CSX CEO Discusses Q4 2010 Earnings Call Transcript

CSX (CSX)

Q4 2010 Earnings Call

January 25, 2011 8:30 am ET

Executives

David Baggs - Assistant Vice President of Treasury and Investor Relations

David Brown - Chief Operating Officer and Executive Vice President

Oscar Munoz - Chief Financial Officer, Executive Vice President, Chief Financial Officer of CSX Transportation Inc. and Executive Vice President of CSX Transportation Inc

Michael Ward - Chairman, Chief Executive Officer, President, Chairman of Executive Committee, Chief Executive Officer of CSX Transportation Inc and President of CSX Transportation Inc

Clarence Gooden - Chief Commercial Officer, Executive Vice President of Sales and Marketing, Chief Commercial Officer of CSX Transportation Inc and Executive Vice President of CSX Transportation Inc

Analysts

Walter Spracklin - RBC Capital Markets, LLC

Peter Nesvold - Bear Stearns

William Greene - Morgan Stanley

Keith Schoonmaker - Morningstar

Justin Yagerman - Deutsche Bank AG

John Larkin - Stifel, Nicolaus & Co., Inc.

Ken Hoexter - BofA Merrill Lynch

Garrett Chase - Barclays Capital

Thomas Wadewitz - JP Morgan Chase & Co

Carter Leake - Davenport & Company, LLC

Kanchana Pinnapureddy

Scott Malat - Goldman Sachs Group Inc.

Chris Wetherbee - Merrill Lynch

Anthony Gallo - Wells Fargo Securities, LLC

Scott Group - Wolfe Research

Christopher Ceraso - Crédit Suisse AG

Donald Broughton - Avondale Partners, LLC

Matthew Troy - Susquehanna Financial Group, LLLP

Jason Seidl - Dahlman Rose & Company, LLC

Cherilyn Radbourne - TD Newcrest Capital Inc.

Scott Flower - Macquarie Research

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the CSX Corporation fourth quarter 2010 Earnings Call. [Operator Instructions] For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Assistant Vice President, Investor Relations for CSX Corporation.

David Baggs

Thank you, Lori, and good morning, everyone. And again, welcome to CSX Corporation's fourth quarter 2010 earnings presentation. The presentation material that we'll be reviewing this morning, along with our quarterly financial report and our safety and service measurements, are available on our website at CSX.com under the Investors section. In addition, following the presentation today, a webcast and podcast replay will be available on the website.

Here representing CSX this morning are Michael Ward, the company's Chairman, President and Chief Executive Officer; Clarence Gooden, Chief Sales and Marketing Officer; David Brown, Chief Operating Officer; and Oscar Munoz, Chief Financial Officer.

Now before we begin the formal part of our program, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements. You are encouraged to review the company's disclosure and the accompanying presentation on Slide 2. This presentation identifies forward-looking statements and risks and uncertainties that could cause actual performance to differ materially from the results anticipated by these statements. In addition, let me also remind everyone that at the end of the presentation, we will conduct a question-and-answer session with the research analysts. With 32 analysts now covering CSX, I would ask that as a courtesy to everyone to please limit your inquiries to one primary and one follow-up question.

And with that, let me turn the presentation over to CSX Corporation's Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Michael Ward

Well, thank you, David, and good morning, everyone. Last evening, we were pleased to report another quarter of excellent financial results, with earnings per share of $1.14. These results reflect our continued relentless focus on delivering value to our customers and our shareholders. With a positive economic backdrop, Clarence and the sales and marketing team were able to leverage our strong service product to increase volume and revenue across each of the three major markets we serve: merchandise, intermodal and coal.

At the same time, in spite of the winter weather that has impacted volume in the last month of the quarter, David and the operating team kept the network fluid and continued to produce strong results in safety, productivity and service for our customers. As a result, CSX posted record results for the fourth quarter, with operating income increasing 46% to $846 million, and with earnings per share increasing 48% to $1.14.

Turning to Slide 5, as we began 2010, we told you that we believe the actions we took during the recession would set the stage for even more business success going forward. As you can see from our results for the full year, that clearly happened. For the year, we set records and operating income up 35%, operating ratio, which improved 380 basis points, and earnings per share, which improved 40%. 2010 was a year of momentum, with volume, revenue, productivity and operating leverage driving strong results. We expect that momentum will continue in 2011.

This year, we expect again to produce record financial results, including a high 60s operating ratio, which positions the company well, as we progress toward our goal of a 65% operating ratio within the next five years. We expect to achieve this, all the while continuing to invest in the business and producing a service product that meets the needs of CSX's growing customer base.

Now let me turn the presentation over to Clarence to review our top line results. Clarence?

Clarence Gooden

Thank you, Michael, and good morning, everyone. As the economy began its second year of growth, positive trends continue to support growth across the businesses that these are. According to the Federal Reserve, industrial production finished the year by rising in December by more than an ad since July. In addition, the manufacturing sector continued to expand for a 17th consecutive month as reflected in our reading of 57 for their latest Institute for Supply Management's index.

These improving trends, combined with the value of our rail transportation product, led to a strong increase in volume experienced during the fourth quarter. As we continue to see growing demand for Rail Service, we remain focused on capturing the value of our services, and we continue to be committed to delivering an even safer and more reliable service product for our customers.

Now let's turn to the next slide and review the results. Let me begin my discussion on this slide by reminding everyone that CSX follows a 52, 53 week fiscal year. As a result, CSX had an extra week in 2010. This resulted in 14 reporting weeks for the fourth quarter. As you can see in each of the charts on this slide, we are providing about a 14 week view, which includes the benefit of the extra week and a comparable 13 week view of our fourth quarter. In the chart on the left, after adjusting for the $171 million in revenue associated with the extra week, our fourth quarter revenue grew 14%. Looking at the two charts on the right, volume and revenue per unit both increased 7% after adjusting for the extra week.

Let me underscore that these 13-week comparable results are non-GAAP financial measures that may provide you with a more meaningful comparison to future and prior quarterly results. Let me also refer you to the quarterly financial report, which presents both GAAP and non-GAAP results by individual markets. That said, the rest of my discussion today will be based on using that 13-week comparable quarter to give you a year-over-year view of our performance.

Now let's look at the components of the change in revenue on Slide 8. On a comparable basis, CSX revenue increased 14% in the quarter due to volume growth, core pricing gains and the impact of higher fuel cost reflected in our fuel surcharge program. As you can see on the chart, volume increases drove $155 million of year-over-year revenue growth. Also, the combined effect of rate and mix accounted for $156 million of the increase, reflecting yield gains across all markets, as we continue to sell the value of CSX's service product and the relative value of rail transportation. Finally, as you look further to the right, the impact of higher fuel cost increased our fuel recovery $14 million in the quarter.

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