CSX's CEO Discusses Q4 2011 Results - Earnings Call Transcript

CSX (CSX)

Q4 2011 Earnings Call

January 24, 2012 8:30 am ET

Executives

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

Cindy Sanborn -

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

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

Keith Schoonmaker - Morningstar Inc., 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

Donald Broughton - Avondale Partners, LLC, 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

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, 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 Fourth 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.

David Baggs

Thank you, Pat, and good morning everyone. And again, welcome to CSX Corporation's Fourth Quarter 2011 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, 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; Sandy Sanborn, Chief Transportation Officer; and Oscar Munoz, Chief Operating Officer.

Now before we begin the formal part of our program, let me remind everyone that the presentation and the other statements made by the company contain forward-looking statements. You are encouraged to review the company's disclosure in the accompanying presentation on Slide 2. This disclosure 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 nearly 30 analysts now covering CSX, I would ask, as a courtesy for 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 Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Michael Jon Ward

Well, thank you, David, and good morning, everyone. Last evening, we were pleased to report record earnings per share for the fourth quarter and full year 2011. Fourth quarter EPS was up 13% to a new fourth quarter record of $0.43 per share. These results were driven by top line growth, reflecting strong core pricing and fuel recovery, as well as an excellent service product. Service measures are now at high levels, thanks to the outstanding execution of our operating team and the recent store investments we made in the second half of the year. We expect service levels to remain high going forward.

Turning to Slide 5. For the full year 2011, CSX generated record performance in operating income, operating ratio and earnings per share. In addition, we strategically positioned the company for long-term growth and set the stage for our 65% operating ratio target. Yesterday, as you know, CSX announced changes to its senior management team. Oscar Munoz is now the company's Chief Operating Officer and Fredrik Eliasson is now our Chief Financial Officer. Both are proven leaders with a passion for driving compelling value for shareholders and customers.

We have excellent momentum in our operations and combined with Oscar's broad leadership and business focus, we will ensure that our outstanding team is even more successful for you, our shareholders.

Fredrik is a proven and respected veteran in our company and will be working with the finance team, that has proven itself to be a strong business partner in helping drive excellent performance for investors. For today, I've asked Oscar to take you through the financials for the last time. And Cindy Sanborn, our Chief Transportation Officer, is here to report our operating performance. With that, let me turn the presentation over to Clarence to review our top line performance. Clarence?

Clarence W. Gooden

Thank you, Michael, and good morning, everyone. As I get started on Slide 7, let me remind everyone that the fourth quarter of 2010 included an extra week. After removing that extra week, you can see more comparable 2010 fourth quarter results with revenue of $2.6 billion, volume of 1.6 million units and revenue per unit of $1,655. In the fourth quarter of 2011, total revenue increased 12%. Volume grew 1%, and RPU improved 10% versus the comparable 2010 results. For the remainder of my presentation, I will use comparable 13-week numbers to give you a better sense of the run rate of our business.

Now let's turn to the next slide and take a closer look at the results. On a comparable basis, CSX revenue increased 12% to nearly $3 billion in the fourth quarter. As you can see on the chart, volume gains drove $51 million in year-over-year revenue growth. In addition, the combined effect of rate and mix accounted for $138 million of the increase, reflecting yield gains across all 3 major markets as we continue to sell the compelling value of rail transportation. Finally, as you look further to the right, increased fuel recovery of $117 million in the quarter helped offset the impact of higher fuel costs.

The next slide shows the volume drivers in the quarter. Total volume increased 1% versus the comparable period from last year. Merchandise, which accounted for 41% of total volume, grew 5% reflecting gains in the majority of the market CSX serves. Intermodal, which accounted for 36% of total volume, was flat as strong domestic growth was offset by weakness in the international business. Finally, coal, which accounts for 23% of the total volume, declined 3%, reflecting strength in exports, that was more than offset by continued softness in demand from electric utilities. I will provide more detail in each of these markets after we look at the revenue per unit on Slide 10.

Revenue per unit increased 10% to more than $1,800 driven by a combination of price, mix and fuel recovery. Same-store sales pricing increased 6.9%. Recall that the same-store sales are defined as shipments for the same customer, commodity and car type, and the same margin in destination. These shipments represent approximately 75% of the CSX traffic base. Mix also had a modest favorable impact on the revenue per unit change. Finally, increased fuel recovery, a result of higher fuel costs in the quarter, contributed to higher revenue per unit. Now let's take a look at each of the major markets that we serve starting with coal.

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