No Turning Back, Foote Says

New CSX CEO James M. Foote wanted to make one thing clear. On his watch there will be no turning back from the commitment made to precision scheduled railroading that the late E. Hunter Harrison brought to the carrier last year.

James Foote

During a conference call on Wednesday to discuss the railroad’s fourth quarter financial results, Foote praised Harrison and said CSX would not be where it is today without him.

“I am committed to seeing his vision through and making CSX the best railroad in North America,” Foote said.

Speaking during the same conference call the newly-appointed CSX vice president of operations, Edmond Harris, said the carrier will continue what Harrison started, including operating fewer trains, putting more locomotives into storage, moving the same tonnage with fewer freight cars, and having a more fluid network.

“The table has been set,” Harris said, saying CSX will take advantage of technology and boost the use of distributed motive power.

Foote said he made changes to the sales and marketing structure to simplify the organization by reducing the leadership group to three business units and aligning certain functions into other departments.

He said he also implemented changes in the operating department at the staff and field levels in order to achieve more efficient operation and achieve service improvements.

Foote noted that one of his first moves as CEO was to order the hump to be razed at Tilford Yard in Atlanta.

The yard, which remains open as a flat switching facility, was one of eight hump yards that were converted last year.

As for what the future holds for CSX operations, Harris said that he favors run-through interchange trains and would like to see CSX bypass the Belt Railway of Chicago by running merchandise trains directly to BNSF and Union Pacific.

He will also seek partnerships with short lines railroads and other Class I carriers to create shorter, more efficient routes.

CSX will study creating directional running for longer trains and will continue to build longer trains pulled by fewer locomotives per train.

Foote said CSX will make it a priority to improve its on-time performance, which was just 56 percent in the fourth quarter of 2017.

Calling that unsatisfactory, Foote said CSX plans to create schedule plans for every carload as a way to improve on-time deliveries.

Foote acknowledged that the rapid changes that Harrison ordered at CSX before his death last Dec. 16, disrupted operations, resulting in angry shippers and additional regulatory oversight.

The railroad also lost some traffic, but Foote predicted that most of it will return. “We are seeing some of those customers return already,” Foote said.

However, CSX doesn’t expect to recoup the 7 percent loss it suffered in domestic intermodal business after it closed its Northwest Ohio Intermodal Terminal and ditched the hub and spoke strategy toward building intermodal traffic.

CSX’s intermodal strategy will be built on increasing container traffic to East Coast ports and not on seeking to develop low-volume service lanes.

Capital spending will fall by 20 percent to $1.6 billion in 2018 on top of a 25 percent cut last year.

That prompted some analysts on the conference call to express concern about CSX’s ability to maintain its infrastructure.

In response, Chief Financial Officer Frank Lonegro said CSX will spend $1.4 billion this year on track maintenance, which he said is about the same as it spent in previous years.

Lonegro said most of the curtailed capital spending would have been for new locomotives and freight cars. But with 900 locomotives in storage, and 20,000 cars sidelined, he said it would be many years before CSX needs to buy more rolling stock.

Looking ahead to a March 1 investors conference, CSX executives said they did not want to provide many details about their expectations for this year and beyond other than they expect the operating ratio to improve due to operations improvements and efficiency gains.

However, they did say that CSX expects to reduce its payroll by 2,000 people this year and that it ended 2017 with 3,282 employees than it had on the last day of 2016. CSX now employs 24,000. CSX also reduced the number of consultants that it hired by 1,418.

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CSX Acknowledges Taking New Approach to Intermodal

Intermodal business is not the only thing that CSX is looking to downsize. Appearing at two investor conferences this week, CSX Chief Financial Officer Frank Lonegro said the railroad is also looking at shedding some lines and curtailing capital expenditures and expansion projects.

“We are in the evaluation phase,” Lonegro said, noting that CEO E. Hunter Harrison has said everything is for sale at the right price.

“Things that are non-core to the long-term business that we have and the long-term success of CSX, those things will ultimately be for sale,” Lonegro told the Stephens Fall Investor Conference.

Lonegro stopped short of acknowledging that CSX is ending the hub and spoke model on which intermodal operations at its Northwest Ohio Intermodal Terminal near North Baltimore are based.

Lonegro said Harrison wants to emphasize intermodal service to higher-volume, point-to-point markets.

As for reports that CSX has canceled plans to build a similar intermodal terminal in North Carolina, he would only say that plans for that terminal are under review.

However, speaking to the Baird Global Industrial Conference this week, Lonegro did say that CSX plans to reduce its capital spending next year and beyond.

This includes storing locomotives and freight cars and putting on hold expansion projects as the railroad transitions into a precision scheduled railroading operating model.

Lonegro said CSX  is likely to hold off on intermodal terminal investments in favor of leveraging the investments the railroad has made over the past decade.

Lonegro’s comments were the first made by a high-ranking CSX executive since a management shakeup in late October that will send three top executives out the door on Nov. 15.

The management changes also led to the cancellation of an investor’s conference that was to have been hosted by CSX in Florida on Oct. 30.

Instead, Lonegro said, Harrison gathered about 30 high-level managers in the Sunshine State and spoke for about six hours during what was billed as a “restart meeting.”

Some railroad industry analysts believe the investor conference that was canceled will be held during the first quarter of 2018.

During his remarks this past week, Lonegro said the North Baltimore terminal was being used by CSX to funnel traffic to and from smaller intermodal markets.

However, CSX has now decided to shut it down because its handling cost reduce profit in a line of business with razor-thin profit margins.

Lonegro said intermodal is all about creating traffic density. “If it costs you more to create the density, then you shouldn’t artificially create the density,” he said.

CSX plans to adopt a different approach to what Lonegro described as “ultra-low density lanes” but did not elaborate on what that will be.

“Hunter’s driving force around the intermodal strategy is to improve the profitability of that segment of the business,” Lonegro said.

Thus far CSX had ended intermodal service in scores of low-volume origins-destination pairs and moved light intermodal traffic in other lanes into its merchandise network.

CSX Managers Tout Service Improvements

CSX executives told a railway conference this week that the carrier is emerging from its operations meltdown and making progress in implementing its precision scheduled railroading operating model.

CEO E. Hunter Harrison acknowledged in a statement issued ahead of the 10th Annual Global Transportation conference sponsored by Cowen and Company in Boston that the railroad’s service problems were in part due to a “too much, too soon” rush to implement the operating model.

But Harrison said CSX management now sees progress in overcoming those problems.

“The railroad is now returning to a normal operating rhythm, and our performance metrics are improving,” Harrison said. “Fluidity in our terminals largely has been restored and we are appropriately resourced to continue making progress. Car dwell has improved from week to week for the past five weeks, and system-wide velocity is increasing.

“I’m confident that many of the challenges we and our customers have recently faced are behind us.”

Chief Financial Officer Frank Lonegro said CSX “continues to expect free cash flow before dividends (excluding restructuring charges) of around $1.5 billion and record efficiency gains for 2017.”

However, the service issues that occurred in July and August have prompted CSX to change its 2017 full-year guidance from an operating ratio in the mid-60s to an operating ratio around the high end of the mid-60s and earnings per share growth from around 25 percent to a range of 20-25 percent.

Despite the improvements, CSX’s on-time performance was 50 percent last week, well behind last year’s 66 percent mark and the record 88 percent recorded in May this year.

“The CSX of the Hunter Harrison era is still under construction,” Frank Lonegro said at the conference. “While I say ‘please pardon our dust,’ I also tell you that the fundamental building blocks are in place to enable us to provide two very important things. The first is consistently high levels of service for our customers and the second is a radically improved financial trajectory for our owners.”

Lonegro said the railroad’s focus now is on reliably executing and refining the new operating plan.

He said CSX still expects to have between two and four hump yards and that by flat-switching two-thirds of its traffic, the railroad can cut the costs of processing cars, bolster yard productivity, trim hump-related capital expenses, and reduce transit time by a day.

Average train length has increased 7 percent since July 1 and fuel consumption has fallen by 6 percent. More than 300 crew starts per week have been cut and employment is down 2,700. CSX has also eliminated about 1,000 outside contractors.

The nine operating divisions of CSX have been reduced to five regions.

Although it has yet to undertake a line-by-line analysis, CSX is willing to consider bids to buy its lighter-density routes. “Everything’s for sale at the right price,” Lonegro said.

Behind the Closing of CSX Hump Yards

CSX has acknowledged that it plans to close its hump operations at Selkirk, New York, and that it also plans to close its hump in Birmingham, Alabama

Both yards will continue in operation as flat-switching facilities. Five other hump yards, including Stanley Yard in Toledo, have already been converted to flat switching.

CSX will still have five active humps, including Queensgate Yard in Cincinnati and Willard Yard. In 2016, Selkirk was the second-busiest hump yard in the CSX system.

Speaking to the Wolfe Research conference this week, CSX Chief Operating Officer Cindy Sanborn said the hump closings are not being implemented just to change switching operations.

“It is part of the larger plan of making transit across the network faster,” she said.

CSX is seeking to bypass intermediate terminals because it believes that doing so will enable it to move freight more efficiently, quickly and reliably.

An analysis by Trains magazine noted that CSX CEO E. Hunter Harrison has said hump yards are only viable when they classify more than 1,400 to 1,500 cars per day.

Of the 12 hump yards in existence when Harrison was hired at CSX last March, only Waycross, Georgia, meets that threshold.

Three yards, Selkirk; Nashville, Tennessee; and Willard handled more than 1,400 cars per day in 2016.

The Trains analysis said those humps were likely to handle less traffic under Harrison’s precision scheduled railroading operating philosophy.

“If there’s not enough cars that want to go there to support the infrastructure needed to maintain and utilize the hump, then we simply don’t need it,” Sanborn said at the investor’s conference. “We can move over into flat-switching operations.”

Sanborn reiterated at the conference that CSX expects to only have two to three humps left by late this year.

Another driving force behind closing the humps is that carload traffic at CSX is in a long-term decline.

CSX handled 2.32 million merchandise carloads in 2016, a figure that excludes automotive traffic.

Trains reported that is a decline of 605,000 carloads since 2000 or 22 fewer 75-car trains per day.

Yet merchandise traffic made up two-thirds of CSX freight business in 2016 and Sanborn said the railroad’s new operating plan provided an opportunity to grow that business by providing faster and more reliable service.

“Concurrent with making the changes in the hump network, we also are doing a very detailed deep dive into the overall operation in general,” Sanborn says.

To improve traffic balance and density, some unit train shipments are being carried by merchandise trains that operate daily. In some regions, local service is now operating daily.

CSX Says On-Time Performance is Up 52%

A CSX executive this week touted improving performance metrics over the past two months, including a 52 percent improvement in on-time performance.

“We’re at the beginning of an amazing transformation,” CSX Chief Financial Officer Frank Lonegro said at the Bank of America Merrill Lynch 2017 Transportation Conference.

Lonegro said train velocity has risen by 14 percent and terminal dwell time has fallen by 11 percent.

On-time originations rose 16 percent to 91.6 percent while on-time arrivals jumped to 87.6 percent from just 57.8 percent.

Lonegro largely credited the improving metrics to new CEO E. Hunter Harrison’s precision scheduled railroad operating philosophy.

Harrison has been at CSX for 10 weeks. “He really has hit the ground running and has begun to implement precision scheduled railroading across our railroad,” Lonegro said.

During his presentation, Lonegro said CSX has become more efficient by hauling the same amount of tonnage on fewer trains.

Although its revenue-ton miles have held steady while the active train count has fallen by 15 percent, Lonegro said that will continue to improve.

He said CSX is creating a train plan that keeps terminals fluid and reduces the need for handling en route.

“Hunter’s philosophy is move the freight as far as you can as fast as you can and touch it as few times as you possibly can,” Lonegro said.

One highly visible change at CSX has been a reduction in hump yards. That is at odds with how CSX has operated.

“At CSX historically we have been a big believer that the most efficient way to class[ify] traffic is through a hump yard,” Lonegro said. “Hunter has totally debunked that.”

CSX has converted hump yards in Toledo, Ohio; Louisville, Kentucky; Hamlet, North Carolina; and Atlanta to flat-switching.

Reports have surfaced that yards in Cumberland, Maryland; and Selkirk, New York, will also lose their humps.

Lonegro said CSX is evaluating its eight remaining hump yards and expects to convert some to flat switching in the second quarter of this year.

In doing this, CSX has changed is operating plan so that traffic bypasses the yards except for cars destined for that location.

CSX will likely have between two and four active humps by the time the evaluation process is completed.

Lonegro also reported that CSX has stored 551 locomotives and parked, scrapped, or returned more than 22,000 freight cars.

He said the operating changes have thus far not prompted shippers to shift their business to Norfolk Southern.

“We’re really not seeing any market share shifts,” Lonegro says, although he acknowledged that there is a potential for service missteps that could anger some shippers.

Nonetheless, he said CSX expects to satisfy customers by providing faster transit times, improved on-time performance, and better cycle times of freight cars.

The better service and lower costs, he said, should enable CSX to grow its business, particularly at the expense of trucks.

Harrison Has Medical Condition That Often Has Him Working From Home, Not CSX Headquarters

The Wall Street Journal reported this week that CSX CEO E. Hunter Harrison has a medical condition that often forces him to work at home.

E. Hunter Harrison

The newspaper gave few specific details about the condition and the 72-year-old executive said that he should not be judged by his medical record.

“I’m having a ball and I’m running on so much adrenaline that no one can stop me,” Harrison told the Journal. “Don’t judge me by my medical record, judge me by my performance.”

Harrison acknowledged that he carries a portable oxygen system, but his doctors cleared him for his position.

“There are times when I get a little shortness of breath so I take oxygen and it helps,”
Harrison said.” Sometimes I get a cough and the oxygen makes it go away.”

CSX Chief Financial Officer Frank Lonegro told an investor conference that Harrison is fully engaged in his job.

“We’re really running to play catch up with him,” Lonegro says. “He’s a 24-hour-a-day, seven-day-a-week kind of guy.”

Trains reported that CSX was well aware of Harrison’s medical condition when it hired him.

However, that was a point of contention at one point when CSX demanded that independent physicians review Harrison’s medical records, a request that Harrison refused.

CSX said it would not comment on Harrison’s health.

The Journal said that during his last two years at Canadian Pacific, Harrison frequently worked from home rather than in his CP office in Calgary.

CSX VP Lonegro Projects ‘Flat to Slightly up’ Earnings Per Share for 4th Quarter of 2016

CSX projects that its earnings per share for the fourth quarter of 2016 will be flat to slightly up.

Executive Vice President and Chief Financial Officer Frank Lonegro delivered that assessment to investors and analysts attending a conference on Thursday.

Although some of the factors that have worked against the carrier’s financial health are moderating, Lonegro said, “At the same time, a recent operating property sale will now offset the impact of a debt refinancing charge announced earlier in the quarter.”

In a news release, CSX said that quarter-to-date volume has declined 3 percent overall, and many markets are showing more moderate declines than in previous quarters.

In particular, coal traffic is showing sequential volume stabilization and is essentially flat to date.

Volume is now expected to decline in the low-to-mid single digit range on a comparable 13-week basis.

CSX Says 2nd Quarter Profits Fell 20%

A 34 percent decline in coal traffic played a major role in CSX seeing its second quarter profit drop by 20 percent.

Earnings per share for the quarter declined 16 percent to 47 cents on revenue of $2.7 billion. The net earnings of $445 million is a 20 percent decline from the second quarter of 2015.

“This continues to be a challenging environment,” CEO Michael Ward said during the company’s earnings call.

CSX saw a 9 percent decline in overall traffic volume with every traffic category posting losses except for minerals and automotive, which were up 13 percent and 1 percent respectively.

CSX did manage to reduce expenses by 9 percent during the second quarter, but its revenue fell by 12 percent.

The railroad said it had efficiency gains of $96 million for the period, lower volume-related costs of $86 million, and $56 million from reduced fuel prices.

The operating ratio was 68.9 percent compared with 66.8 percent for the second quarter of 2015.

Chief Financial Officer Frank Lonegro said during the call that CSX expects to produce nearly $350 million of efficiency savings this year, which is an improvement of the original target of more $250 million.

Lonegro said CSX will continue to “turn over every rock” in an effort to bring expenses in line with revenue.

Among the measures CSX has taken to cut costs are mothballing 350 locomotives.

It still plans to take delivery of 65 new locomotives this year, which means additional active engines are likely to be placed in storage. The new locomotives were ordered in 2014.

CSX Chief Operating Officer Cindy Sanborn said the CSX active locomotive fleet has been reduced by 10 percent, which she said is in line with the decline in gross ton miles.

“I doubt you would see us in the market for new locomotives” in 2017 and 2018, Lonegro said.

Lonegro said CSX will probably rebuild some of its four-axle units used for switching and local service.

The employee head count for the quarter was on average 4,489 less than it was in 2015 for the same period.

Railroad executives said operational performance improved with on-time originations hitting 88 percent during the second quarter, which they said is a 33 percent improvement. On-time arrivals were 69 percent, a 44 percent improvement.

Ward said that “service continued to meet and exceed customer expectations.”

Fredrik Eliasson, chief sales and marketing officer, said that in a lower volume business climate improving service is critical to maintaining strong pricing.

Sanborn said CSX is trying to strike a balance between maintaining service levels and cutting costs by implementing such measures as running longer trains and using variable scheduling, Sanborn said.

“We are making the right tradeoffs between productivity and service,” Eliasson said.

CSX expects to see full-year volume and earnings declines with the third quarter presenting major challenges.

CSX Revises 2nd Quarter Earnings Downward

With traffic falling, CSX has revised downward its earnings expectations for the second quarter.

“We are seeing year-to-date volume declines across most of our markets, reflecting continued low global commodity prices, the strong U.S. dollar and the transition in the energy markets,” said Frank Lonegro, CSX executive vice president and chief financial officer. “For the second quarter, we now expect high single-digit volume declines, which will negatively impact second quarter earnings.”

Speaking during an investor’s conference, Lonegro said that the railroad has implemented steps to cut costs by about $250 million during 2016.

That would best the original projected cost-cutting target of $200 million.

CSX expects that its earnings for 2016 will decline, the first time it has seen a full-year earnings falloff since the recession of 2008-2009.

Currently, CSX has 1,900 train and engine service employees on furlough, but some of them are expected to be recalled to replace employers who are retiring.

During a previous investor’s conference, CSX had said that it expected traffic for the second quarter to fall by mid to high single-digits.

Thus far overall traffic is down 9 percent. Coal continues its free fall, having fallen by 34 percent for the quarter to date. Intermodal traffic is down by 17 percent.

Nonetheless, CSX management expects intermodal to eventually surpass coal on a volune and revenue basis.

The railroad is still looking for ways to cut costs in its central Appalachian coal network by closing or downgrading branch lines and through routes. Coal tonnage is expected to fall 25 percent over the full year.

As part of its recently announced CSX of Tomorrow plan, the railroad will concentrate traffic and capital investments on its three corridors: The Interstate 90 corridor between Chicago and the Northeast, the Interstate 95 corridor between the Northeast and Florida, and the Southeast Corridor between Chicago and Florida.

Lonegro said that as coal continues to decline, CSX will invest in its intermodal and merchandise network so that it can continue to improve service, gain volume and realize price increases.

It estimates that there are 9 million truckloads now moving over highways in the East that are easily convertible to intermodal.

To reap that traffic, CSX will need to create additional intermodal terminals not unlike its Northwest Ohio intermodal terminal in New Baltimore.

One such terminal is being planned for North Carolina.

CSX Makes Traffic Gains, Still Faces Challenges

A CSX executive told a financial conference on Wednesday that falling coal traffic, the effects of a strong U.S. dollar and low global commodity prices challenged the railroad in 2015 and continue to offer strong headwinds as it navigates through 2016.

Chief Financial Officer Frank Lonegro told the Barclays Industrial Select Conference in Miami that in the past five years CSX has grown its merchandise and intermodal business faster than the economy and delivered strong pricing and efficiency gains.

Lonegro said that has enabled CSX to produce earnings per share of 4 percent and post an operating ratio below 70 percent in 2015.

He said CSX expects its coal volume to fall more than 20 percent and most other markets to continue posting year-over-year declines in 2016.

“Based on the trends so far this year, we expect volume to decline in the mid-high single digits this quarter and to gradually moderate as we move through the year,” Lonegro said. “We expect first quarter earnings to decline significantly, reflecting both this volume environment and the fact that we are cycling more than $100 million in unique items from the first quarter of 2015.”

Lonegro told conference attendees that in 2016 CSX plans to reap $200 million in productivity savings.

The railroad expects to further reduce structural resources and match resources with volume declines near term while also remaining well-positioned to serve demand shifts once the economic challenges begin to subside.

“In this environment, we continue to focus on the things most in our control, including delivering safe, reliable service that increases operational efficiency and supports strong pricing for the value we provide to customers,” Lonegro said. “As we look toward a future with significantly less coal, our strategy includes rationalizing and realigning the network to match decreased demand in some markets and adjust to increases in others, investing in clearance and terminal projects to leverage intermodal growth, and optimizing technology to serve the CSX of tomorrow as we continue to target a mid-60s operating ratio longer term.”