NEW YORK (TheStreet) -- In recent weeks, retailers Walmart (WMT - Get Report) and J.C. Penney (JCP - Get Report) have voiced concern over consumer spending in the U.S., as have companies such as McDonald's (MCD - Get Report) and Dunkin' Donuts (DNKN - Get Report) .
But there's a shale oil boom in North Dakota while growth in China hasn't fallen off a cliff like it has in the eurozone. Mixed reads on the global economy have become the new normal for investors.
But railroad operators continue to chug along with volume increases and pricing power, despite the gloomy headlines. TheStreet interviewed Michael Ward, CSX (CSX - Get Report) chairman, president and CEO, to get his take on the global economy and what his company is doing operationally to move its business forward.
CSX derives about 60% of its annual revenue from the shipment of merchandise such as food, appliances and manufactured goods. Annual revenue from coal clocks in a distant second at 24%, followed by intermodal at 14%.Dunkin' Donuts CEO Is Pushing to Win the Battle for Breakfast
Brian Sozzi: A good portion of CSX's volume is derived from the shipment of merchandise, from food to consumer goods. We have already begun to hear warnings on the holiday season from big name retailers, such as Walmart and J.C. Penney. Do you echo that caution based on trends you saw in your business toward the end of the third quarter?
Ward: We saw strong growth in the third quarter, with quarterly-record revenue on top of 7% volume growth. Looking ahead to the fourth quarter, we see stable to favorable conditions for 96% of our markets. The majority of the consumer goods that we transport are in intermodal containers, which means they seamlessly transition from ships to rail to trucks. Intermodal takes advantage of the long-haul efficiency of rail and the short-haul flexibility of trucking to improve efficiency and options for our customers. We expect intermodal movements on CSX to grow next quarter, as our investments in new facilities and additional capacity help to drive conversions of freight from the highway to the railroad.
In addition to intermodal, railroads are an important pipeline for other parts of the industrial economy -- delivering critical inputs for manufacturing, moving goods to marine ports for export, and supplying distribution centers with domestic and international inventory.
In addition to the specific movements we see, the economic indicators that CSX tracks -- including housing starts and automobile production, in addition to the Purchasing Manager's Index and Customer Inventory Index -- all point to continued expansion in the fourth quarter and longer term. As CSX continues to take advantage of these positive economic indicators, we are well-positioned to keep moving the goods that American consumers and businesses demand.
Sozzi: Last holiday season there was significant stress placed on the infrastructure of logistics companies as more goods were ordered online. Further, more retailers are offering ship from store, while same-day delivery services appear to be the next dimension to commerce. What are your views on how the rush to reduce shipment times, fueled by mobile buying, will change the railroad industry?
Ward: CSX is investing today in the intermodal network of the future. The U.S. population is only going to increase, and that means that demand for freight services will continue to increase. In fact, the U.S. Department of Transportation projects that freight demand will rise 60% by 2040. Rail will continue to play a huge part in the country's transportation supply chain, especially since rail is the most environmentally friendly way to move all of those goods over land. We are experimenting with new ways to improve the precision of our consumer goods shipments, including narrower delivery windows for our intermodal trains and more real-time communication tools that let our customers better anticipate when their shipments will arrive. These advances help us better serve our customer, while also improving the efficiency and asset utilization of our network.
In addition to the tools and technology, we're investing in facilities that allow businesses to more closely connect to our intermodal network -- including new intermodal terminals in Montreal, Quebec and Pittsburgh, Pennsylvania. These terminals enable local and regional shippers to connect to the efficiency of intermodal arteries so their goods get to market and to consumers in time. We're also expanding our Northwest Intermodal facility, which was completed in 2011, in response to increases in customer demand. That facility has been transformative in connecting to small- and medium-sized markets, meaning that those businesses can more easily reach consumers around the country and the world.Must Read: Timberland Owner VF Corp. is "Looking Hard" for Acquisitions, Says CFO
Sozzi: Tesla ( TSLA - Get Report) is revolutionizing the automobile industry with its $100,000 electric cars. More electric cars from the "Big 3" are likely on the way. CSX is a big supplier of coal to electricity-generating plants. When you talk with key partners in the electricity business, what are their views on the impact of electric cars to their businesses moving forward?
Ward: CSX ships a variety of energy-related products -- we now have the most diversified portfolio in our company's history. Of course coal is still a part of that portfolio, and we have seen an uptick in our utility coal shipments in 2014 as last year's brutal winter and relatively higher natural gas prices combined to increase demand by the utilities CSX serves.
CSX already plays an important role in domestic auto production, moving finished vehicles to dealers here in the United States and to coastal ports for export. In talking with our partners, they emphasize that while electric and hybrid vehicles represent an exciting new chapter in automobiles, the fuel efficiencies gained with traditional internal combustion engines continue to be remarkable. At the same time, CSX is already moving some electric and hybrid vehicles -- both parts and finished vehicles -- on its automotive network. If electric vehicles gain a significant market share, we could certainly expect the demand for base load electrical generation to increase, particularly during the overnight hours when the vehicles would be charging.
Sozzi: The trucking industry seems unable to hire workers despite sweetened compensation packages, and the shortage is really crippling their operations. What has been your experience in 2014 with finding skilled labor?
Ward: Railroads are helping to provide relief to trucking companies that are struggling to attract enough drivers, by converting shipments from highway to rail and allowing truck drivers to focus on local pickup and deliveries.
CSX continually adjusts employment levels in response to business conditions to meet the needs of our customers. We are expecting to hire about 3,000 new employees this year, primarily to offset attrition and also to support service recovery and long-term growth. For our train and engine employees, we usually see about 100 applications for every job we post - they're high-paying jobs with hands-on work that supports economic growth. Like many companies, we are seeing the Baby Boomer generation retiring, which will continue to drive increased hiring.
We're also proud that many of our employees have experience in the armed services - nearly one in five have served in active duty or in the Reserves. The skills that our veterans possess - leadership, personal and professional maturity, a focus on safety and the ability to constantly adjust priorities - make them excellent candidates for railroad jobs.
From a training perspective, all of our new employees go through our Railroad Education and Development Institute in Atlanta, where we teach them the ins and outs of railroading and help them to hone their crafts. By the end of 2014 we expect to have 1,300 train and engine employees in training. All of that training is part of the reason that it takes six to nine months for new employees to have a significant impact on the network, which is something we're working through with this year's significant increase in freight demand.Must Read: Papa John's Founder, CEO on the Pizza Wars: "Now We're Back to our Culture of Tinkering"
Sozzi: The oil boom in North Dakota has been something to marvel at, and something railroads have benefited from to a significant degree. How has this boom impacted the shipment of other goods such as food, grains, etc.?
Ward: America's energy boom has created an unexpected opportunity for energy independence, and the railroads are an important part of the energy supply chain to help achieve that independence. This represents a growing business for CSX, although it's important to note that crude oil still represents less than 2% of our volume. There is certainly a keen focus across the industry on recovering service levels related to the high volume levels we are seeing across nearly all of the markets we serve - not just crude oil. We continue to focus on delivering every shipment on CSX safely and efficiently.
CSX saw stable service measurements in the third quarter, albeit still below the levels that our customers expect and that our team can deliver. That's why we continue to invest in personnel, locomotives and capacity to improve performance for all customers across our entire network, in addition to process improvements to increase network fluidity ahead of another winter, and improved communication with both customers and the other railroads with which we interchange. We're also working hard to improve fluidity at the Chicago interchange, where all six Class I railroads come together and where most of the crude oil that travels on CSX is picked up. We've spearheaded new industry communication initiatives and have put in place operational protocols that will allows us to work with our customers and the other railroads to ensure we're supporting the growth our customers are experiencing.
Sozzi: When many think of "cyber attacks" they immediately imagine retailers and banks being attacked by overseas predators. However, a railroad such as CSX utilizes a great deal of information technology in its operations as well. What is the company doing investment wise to protect its data?
Ward: For a company that has been in business for more than 180 years, CSX understands the critical importance of offering secure business solutions for employees and customers in the 21st century, including implementing modern information technology systems. Many of our core business processes are supported by technology solutions designed to enhance our safety performance, increase operational efficiency to drive customer value, and better serve our 31,000 employees across the network.
Like any large company, we have to protect employee information and other sensitive data in addition to the information that enhances our operations, and we have invested in high-quality systems to protect the integrity of both kinds of data. In addition to creating a strong information technology perimeter in cyberspace, CSX also uses detective and corrective controls to contain and minimize the risk from increasingly sophisticated threats. To amplify our reach, CSX relies on partnerships that deliver timely and actionable cyber intelligence. We also benchmark our processes against best practices to ensure that we stay far in front of emerging threats. By focusing on solid security fundamentals, and keeping an eye on emerging threats, CSX successfully provides the reliable IT environment that our business and customers demand.
Sozzi: Could you share any observations on Burlington Northern made by you and the team in the past year? I feel as if post its acquisition by Berkshire Hathaway it has disappeared from the news, but obviously remains a key competitor to CSX and others.
Ward: CSX collaborates effectively with all of the railroads with which we interchange, and we're focused on continuous improvement. While BNSF is privately held, the company continues to share important operating and service measurements that provide insight into its operations. We have joint line movements between BNSF and CSX that require close coordination by the two companies to effectively serve customers. Across the industry, railroads are focused on delivering the best service we possibly can in this time of high demand, and making smart investments to capture additional growth opportunities and support customer business growth moving forward.