CSX's CEO Discusses Q3 2011 Results - Earnings Call Transcript

CSX (CSX)

Q3 2011 Earnings Call

October 19, 2011 8:30 am ET

Executives

Clarence W. 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

David Baggs - Vice President of Capital Markets and Investor Relations

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

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

David A. Brown - Chief Operating Officer and Executive Vice President

Analysts

William J. Greene - Morgan Stanley, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

Scott H. Group - Wolfe Trahan & Co.

Walter Spracklin - RBC Capital Markets, LLC, Research Division

Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division

Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division

Garrett L. Chase - Barclays Capital, Research Division

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division

David Vernon - Sanford C. Bernstein & Co., LLC., Research Division

Christian Wetherbee - Citigroup Inc, Research Division

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Allison Landry - Crédit Suisse AG, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the CSX Corporation Third Quarter 2011 Earnings Call. As a reminder, today's call is being recorded. [Operator Instructions] For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, Vice President of Capital Markets and Investor Relations for CSX Corporation. Sir, you may begin.

David Baggs

Thank you, Lawrie, and good morning, everyone. And again, welcome to CSX Corporation's third quarter earnings presentation. The presentation material that we'll review this morning, along with our quarterly financial report, our safety and service measurements, are all available on our website at csx.com under the Investors section. In addition, following the presentation, a webcast and podcast replay will be available on the same 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. These disclosures identifies forward-looking statements and risks and uncertainties that could cause actual performance to differ materially from that 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 nearly 30 analysts covering CSX, I would ask 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 J. Ward

Well, thank you, David, and good morning, everyone. Last evening, CSX reported record third quarter earnings per share of $0.43, up 19% in a moderating economy. Revenues were up 11% from the prior year to nearly $3 billion, with increases across all major markets. These results reflect a compelling value of freight rail transportation and recoveries associated with higher fuel costs. At the same time, we invested in additional resources to enhance customer service. As a result, by the end of the quarter, service reached the higher levels achieved in 2010 and we have positioned ourselves better for the future.

From a financial perspective, CSX delivered third quarter operating income of $878 million and a strong operating ratio of 70.4%. The underlying fundamentals of our business continue to support our aspirations for the future. In the near-term, that means the continuation of steady volume growth and financial performance. We remain highly committed to a 65% operating ratio by no later than 2015 and we fully expect that this will be achieved. Longer term, the outlook for freight rail transportation remains attractive, as the population grows and the need for cost-effective and environmentally friendly transportation solutions becomes even greater.

With that, let me turn it over to Clarence to discuss our top line results in more detail. Clarence?

Clarence W. Gooden

Thank you, Michael, and good morning, everyone. Positive trends continue in the economy, although at a more moderate pace amid the uncertainty associated with the current environment discussions with CSX customers and key leading indicators continue to point to growth in most of the markets that we serve.

Looking at the charts on the slide, the Purchasing Managers Index registered a reading of 51.6 in September indicating a continued expansion of the U.S. manufacturing. Please recall that a reading above 50 indicates expansion. At the same time, the Customer Inventories Index registered a reading of 49, indicating that respondents believe that the inventories are still low. Overall, transportation demand in the markets we serve continues to support profitable growth, and CSX remains committed to delivering the value of rail transportation for our customers through a safer, more efficient, more reliable service product.

Now let's turn to the next slide to review the results. CSX revenue increased 11% to nearly $3 billion. As you can see on the chart, volume increases drove $20 million of the year-over-year growth in revenue. Also, the combined effect of rate and mix accounted $153 million of the increase, reflecting yield gains across all markets as we continue to sell the compelling value of rail transportation.

Finally, as you look further to the right, increased fuel recovery of $125 million in the quarter is helping to offset the impact of higher fuel costs.

Let's turn now to the next slide and take a closer look at the volume growth. Total volume increased to 1% versus the same period last year. Merchandise, which accounts to 40% of the total volume, grew 2% reflecting gains in a majority of the markets that CSX serves. Intermodal, which accounts for 36% of the volume, was flat as domestic growth was offset by weakness in the international segment. Finally, Coal, which accounts for 24% of the volume declined 1%, reflecting strength in exports that were more than offset by the continued softness in demand from electric utilities. I will provide more detail on each of these markets after a brief discussion of changes in revenue per unit.

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