Q1 2012 Earnings Call

April 18, 2012 8:30 am ET


David Baggs - Vice President of Capital Markets and Investor Relations

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

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

Oscar Munoz - Chief Executive Officer, Chief Operating Officer and Executive Vice President

Fredrik J. Eliasson - Chief Financial Officer and Executive Vice President


William J. Greene - Morgan Stanley, Research Division

Ken Hoexter - BofA Merrill Lynch, Research Division

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

Scott H. Group - Wolfe Trahan & Co.

Christian Wetherbee - Citigroup Inc, Research Division

Christopher J. Ceraso - Crédit Suisse AG, Research Division

Robert H. Salmon - Deutsche Bank AG, Research Division

Brandon R. Oglenski - Barclays Capital, Research Division

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

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

Cherilyn Radbourne - TD Securities Equity Research

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

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

Matthew Troy - Susquehanna Financial Group, LLLP, Research Division

Walter Spracklin - RBC Capital Markets, LLC, Research Division

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

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

Keith Schoonmaker - Morningstar Inc., Research Division



Good morning, ladies and gentlemen, and welcome to the CSX Corporation First Quarter 2012 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, Lori. And good morning, everyone. And again, welcome to CSX Corporation's First Quarter 2012 Earnings Presentation.

The presentation material that we'll review 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 this morning, 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, our Chief Sales and Marketing Officer; Oscar Munoz, Chief Operating Officer; and Fredrik Eliasson, Chief Financial Officer.

Now before we begin the formal part of the 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 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 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 Corporation's Chairman, President and Chief Executive Officer, Michael Ward. Michael?

Michael Jon Ward

Well, thank you, Dave. And good morning, everyone. Last evening, CSX was pleased to report record financial results for the first quarter. Earnings per share were $0.43, up 23% from the same period last year. Despite significant weakness in utility coal, we continue to see broad-based revenue strength across nearly all of our markets. This led to a revenue growth of 6% to nearly $3 billion in the quarter. Our team supported the revenue gains with excellent results in safety, service and productivity. These are the foundations of our business and our ability to drive value for both customers and shareholders.

The strong revenues and operational results produced an 11% increase in first quarter operating income versus the same period last year and 140 basis point improvement in operating ratio. Both were first quarter records and an indication of our commitment to producing strong results for our investors.

With that, I'd like to turn the presentation over to Clarence Gooden for his sales and marketing review. Clarence?

Clarence W. Gooden

Thank you, Michael. And good morning, everyone. Before I discuss the quarterly results in detail, let me take you through our near-term outlook. Most key indicators we look at continued to project year-over-year growth in 2012, which supports our expectation that the second quarter outlook is favorable for 58% of our volume and stable for 32% of our volume. Utility coal, which represents about 10% of CSX's volume, is the only market with an unfavorable outlook. However, with a growing economy, continued truck conversions from the highway and the onboarding of the new Maersk business, Intermodal is expected to continue leading our growth. In addition, the expanding industrial economy supports growth in our Automotive and Metals markets and stability in our chemicals market.

Modest improvement in the housing and construction sectors supports growth in our Forest Products business and a stable environment for emerging markets. While the overall agricultural sector is expected to be stable, we see upside in our phosphate and fertilizer market. And finally, we expect stability in our Export & Industrial Coal business. This outlook is generally consistent with what we experienced during the first quarter, which I will begin to review on the next slide.

CSX revenue increased 6% to nearly $3 billion in the first quarter. Starting with the left gold bar, you can see that the volume gains of 1% drove year-over-year revenue growth of $26 million. Moving to the right, the combined effect of rate and mix accounted for $64 million of the increase, reflecting yield gains across all 3 major markets as we continue to sell the value of rail transportation and the excellent value of CSX's service product. Overall, pricing in excess of inflation more than offset the mix impact associated with the higher Intermodal growth and declining coal volume. Finally, as you look further to the right, increases in the price of fuel resulted in an additional $66 million of recovery in the quarter, which helped to offset the impact of higher fuel costs.

Now, let's take a look at each of the major markets that we serve starting with coal. Coal revenue decreased 5%, driven by weaknesses in utility coal volume that more than offset the strength in Export & Industrial Coal. Domestic utility tons declined 28% as overall electrical generation was down in the eastern United States. In addition, natural gas prices remained at low levels, which led to the continued displacement of coal at some utilities. Partially offsetting this weakness, Industrial Coal tons grew by 11%, driven by increased domestic steel production, while export coal tons grew 17% as demand was strong for U.S. thermal coal shipments. Looking ahead, demand for export coal should remain strong with the increasing demand for thermal coal being offset by weakness in the metallurgical shipments. Overall, we still expect export volumes similar to the 2011 levels.

In addition, strength in shipments of industrial coal is expected to continue due to the increased steel production. At the same time, domestic utility volumes are expected to face continued challenges due to the low natural gas prices, above normal inventory levels and environmental regulations. Headwinds should be strongest in the second quarter and then moderate throughout the balance of the year.

Read the rest of this transcript for free on seekingalpha.com