HIGHLIGHTS FROM THE MAY 2008 ISSUE
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CSX powers up for a fight
Spectacularly no longer the underachiever it was perceived to be only a few years ago, CSX is making the most of an industry-wide surge.
Facing challenges that could change the course of U.S. railroading, CSX—for years a sluggish, confused giant that was perceived as being unable to sustain momentum, repeatedly taking one step forward, two steps back—has over the past three years turned into a lean, productive organization, a virtual fighting machine that’s now in the midst of a battle that reaches to the very core of railroading.
Chairman, President, and CEO Michael Ward and the experienced management team he leads are engaged in a struggle—in Wall Street terms, a proxy fight—to preserve the things that are central to a railroad’s existence and its long-term success: the ability to continuously invest in its physical plant, not only in routine maintenance and improvement, but also in long-term growth; to continue to deliver service improvements while meeting vital national transportation needs; to provide shareholder return on investment that balances long-term viability with shorter-term profitability; to operate a safe railroad.
These tasks are charged to senior managers like Executive Vice President and Chief Operating Officer Tony L. Ingram, EVP and Chief Financial Officer Oscar Munoz, and EVP-Sales and Marketing and Chief Commercial Officer Clarence W. Gooden, and a host of other top-flight people.
Challenges from short-term-focused hedge funds aside (and this may well prove out to be no more than a temporary distraction), CSX management can reflect upon the past few years as ones of solid, steady progress. CSX has finally put to rest the image of an underachiever. Though it remains a complex, challenging-to-manage system cobbled together over many years from a collection of geographically and corporate-culturally diverse railroads, it has finally broken free of the tangled shackles of the John Snow era, when it seemed to be spending most of its time trying to determine who it was and in what direction it should be headed. It’s now riding the crest of the railroad industry resurgence, rather than thrashing around in the backwash.
Part of the change is due to the fact that, at least for the foreseeable future, the Eastern railroad map has stabilized. The tumultuous chess game of mergers and acquisitions and power plays that began in the 1950s, when the Chesapeake & Ohio attempted a merger with the New York Central System and culminated in the split-up of Conrail between CSX and Norfolk Southern, ended a decade ago. But mostly, it’s due to good management and good people running a good, perhaps even great, railroad. The days of “rotating leadership” and “flavor of the month” operating plans, as Ward tells Railway Age, are over. The railroad has steadfastly stuck with its One Plan operating strategy and “made it work,” he says. The Conrail split is “ancient history” to the many new faces at CSX, who sometimes ask, “What rough times?” So there’s a lot of fresh perspective, and the company has “consistent themes and values” to impart to employees.
“We’re producing and delivering for our shareholders, and investing prudently in long-term growth,” says Ward. “Our safety record has improved dramatically. Our customers are feeling better about our service, and our customer satisfaction ratings are at their highest level ever. These are all the things you would expect from a well-run company.”
Ward exudes the confidence that you would expect from a chief executive who has presided over a long period of continuous improvement, but who also knows that there is more work to be done. This was demonstrated in a robust first-quarter 2008, when CSX posted earnings of $351 million, or 85 cents per share, compared with $240 million, or 52 cents per share, in the year-ago period. That’s an EPS growth of better than 60%. In this year’s first three months, CSX reported a consolidated operating ratio of 76.9%, based on record operating income of $626 million, compared with a ratio of 80%, on income of $485 million, in the year-ago period. The company also notched record first-quarter revenue of $2.7 billion, up 12% from 2007. Revenue growth in six of 10 market sectors overcame weakness in the housing and automotive markets.
“Our highly focused workforce continued to drive shareholder value at a record-setting pace in the first quarter by delivering outstanding safety, customer service, and financial results,” said Ward when first-quarter results were announced. “The diverse business portfolio we have created is allowing us to grow through the current [recessionary] economic cycle.” He affirmed CSX’s long-term financial targets, anticipating an operating ratio in the low 70% range and free cash flow before dividends in excess of $1 billion in 2010. “CSX is poised and motivated to deliver substantial value in the short term while enhancing its network and service to create value for many years to come,” Ward said.
Wall Street concurs, as transportation analyst and Railway Age Contributing Editor Jason H. Seidl reported following CSX’s results. “CSX’s long-term prospects are very strong as the company continues to benefit from core pricing strength and productivity initiatives,” he said. CSX was among the companies cited late last month by the Financial Times and the Wall Street Journal as responsible for a broad-based market rally. And as roadway congestion and high fuel prices continue to drive shippers to the railroads, CSX expects its rates to rise 5% to 6% this year, with only a small portion of that stemming from fuel surcharges meant to offset rising diesel prices.
The year 2007 was the safest in CSX’s history. Since 2004, the company has achieved a decrease in personal injuries of nearly 50%, and has reduced train accidents by 42%, both of these industry-leading improvements. “When it comes to safety, a newer and more efficient railroad is a safer and more secure railroad,” Ward says. “But improving safety is not just about switches, handbrakes, and global positioning systems. It’s also about investing in employees.” Here, there’s a measure of long-term stability. Since CSX has had to replace 50% of its workforce over the past five years, a good 20% of current employees are expected to remain on board until about 2020. Ward notes that nearly 20% of CSX employees are armed forces veterans, “a ratio we hope to increase.” The military has been a good source of management trainees, because these people “are in tune with the ideas of a mission to be accomplished, providing leadership, and working in a 24/7 environment,” he says.
As for service metrics, CSX has led North American Class I railroads in train velocity and car dwell time improvements over the past three years. “Operational improvements over that period were driven, in part, by strategic capital investments,” says Ward. “Disciplined execution of our One Plan operating plan also was a factor. Since 2004, our operating income has nearly doubled, and the surface transportation operating ratio has improved to its best level in a decade.”
As a result, the value of CSX stock has improved more than 150% in the past three years, which has provided shareholders with an ROI “better than the rest of North America’s Class I’s and 94% of all S&P 500 companies,” Ward says. “In 2007, surface transportation revenue exceeded $10 billion for the first time and operating income increased to $2.2 billion, a 14% increase over 2006 levels.”
CSX has invested more than $4 billion in capital improvements in the past three years “to meet heightened demand,” Ward says. “We intend to increase investment to nearly $5 billion over the next three years to continue to meet that demand.” For example, the 2008 Engineering capital plan is $684 million. It includes replacing or installing 600 miles of rail, surfacing 6,125 miles, grinding 18,000 miles, and installing three million ties and 3.9 million tons of ballast. A significant percentage of capital investment goes to technology initiatives “that make our railroad run both more efficiently and more safely,” he says. For example, Event Recorder Automated Download (ERAD) systems have been installed on 1,500 locomotives, and by year-end 2009, CSX will have ERAD installed on 3,000 locomotives. ERAD, which uses WiFi to capture data from locomotive onboard computers as they pass through terminals, provides data to improve train handling and fuel efficiency.
“Anyone who understands the rail industry—indeed, the transportation network as a whole—knows that we need to maintain and even increase our investments where possible to prepare for future demands for our service,” says Ward. “If the railroads reduce capital spending and cease investing for the long-term—due to pressure from hedge funds or for other reasons—the rail network would suffer, resulting in service deterioration and impaired ontime performance.” The hedge fund issue is being handled by small team of CSX senior managers, “so everyone else can focus on running the railroad,” Ward says.
A core CSX value Ward likes to stress is “right results the right way.” “While we’re pleased with our record of improving operational performance and creating shareholder value, we are equally proud of the corporate governance structure that allowed us to achieve these results,” he says. “CSX has a Corporate Governance Quotient (as determined by Institutional Shareholder Services, Inc.) that is better than 92.6% of S&P 500 companies, and 98% of transportation companies.”
Photo by CSX
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