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July 2011
by Jeff Stagl, managing editor
Michael Ward is quickly thumbing through a 54-page printout of senior executives' Power Point presentation from a May 18 investor conference held in Detroit. He's trying to illustrate a point about how CSX Corp. has significantly improved its financial performance since he became chairman, president and chief executive officer in 2003. Ward has the figures down cold, so it doesn't take him long to find the page he wants while sitting at a conference table in his Jacksonville, Fla., office.
"Here it is. At the end of 2010, operating income more than tripled, earnings per share increased five-fold and the operating ratio improved 1,750 basis points since 2003," he says, pointing at a Power Point slide.
Ward is proud of CSX's accomplishments. But on this early-June day, past achievements weren't the main topics of conversation. Discussing ways the company can continue to improve its financial metrics and boost other performance measures were.
Using the Detroit presentation as a reference, Ward identified some of them: boost productivity, improve service performance, raise rates and take on more traffic
All those objectives are part of "Grow to 65," an initiative senior execs introduced earlier this year to reduce the operating ratio (OR) from 2010's record 71.1 to a high-60s mark in 2011 and mid-60s level by 2015.
Much like a "Drive to 75" initiative that was launched in late 2006 to lower the OR from the low 80s to mid-70s by 2010 — a target reached one year early — Grow to 65 will help make the company more productive and efficient, elevate rates above inflation levels, garner cost savings and drive down the OR to a level never before achieved at CSX, says Ward.
Yet, there's one major difference between the two initiatives: Grow to 65 includes business growth as a primary component, he says. And sustainable growth at that.
At the investor conference, senior execs defined "growth" as global growth, which would be driven from tapping additional worldwide market opportunities, especially after the Panama Canal's capacity doubles by 2015; profitable growth, which would be spurred by diverting and winning more traffic in the highly populated, high-consumption eastern U.S. markets served by CSX, where top execs believe the railroad is well positioned to compete for new business; and shareholder value growth, which would be propelled by reaching various financial targets, such as a 12 percent to 14 percent gain in operating income and 18 percent to 20 percent hike in earnings per share, between 2011 and 2015.
No matter how it's defined, growth is essential to CSX's long-term viability, Ward says.
"We have confidence in our ability to grow," he says. "But we want to grow smartly, and not just chase business."
Therefore, it's vital that "dogs want to eat the dog food," he says — meaning shippers want to tap an intermodal network CSX is trying to establish that would help them reach new markets and speed freight to and through the Chicago gateway, and access an export coal network the railroad is attempting to beef up that would speed metallurgical coal to East Coast port terminals, and in greater volumes.
But Grow to 65 likely will be more difficult to achieve than past initiatives, says Ward.
Pulling it off hinges on executing ambitious and costly intermodal and coal network expansion strategies, and implementing a complex performance improvement plan designed to improve carload service reliability and consistency by better aligning merchandise customers' needs with operational capabilities.
"The merchandise network is really complicated," says Ward. "We're just taking baby steps now."
Yet, even if several small steps and a few giant leaps don't result in meeting all the initiative's goals, CSX figures to become a better service provider and financial performer because of the process.
Sometimes, swinging for the fences with overly ambitious objectives is a better than settling for a series of easier-to-achieve singles, Ward believes.
"It's not always a good thing to meet a goal," he says. "A met goal sometimes has no value because you feel like you made it or feel too good about yourself."
It's going to take a home run to pull off the tricky carload service-change effort, senior execs believe. Earlier this year, the railroad began to implement Total Service Integration (TSI) for the complex carload network, which is connected to more than 5,000 customer facilities, has a high degree of variability each day and involves dozens of CSX employees to execute, including sales, billing and asset planning workers, and train crews.
TSI is a service design initiative designed to align operating capabilities with customers' needs to reduce loading and unloading times — especially at a shipment's first and last mile — and create more capacity.
First-mile issues involve locomotive and rail-car utilization and crew resource demands, while last-mile issues involve car delivery times and shipment data accuracy.
CSX implemented TSI on the trainload network in 2007, and since has increased the average number of cars per train from 91 to 96 and improved asset utilization, senior execs say.
Applying TSI to the carload network — which accounts for 40 percent of annual revenue — will improve service consistency for each merchandise shipper, says CSX Vice President and Chief Transportation Officer Cindy Sanborn. The initiative also will make the railroad "truly interactive" with every customer, ensuring shipments don't "get bogged down" by the operational processes in place at customers' plants or in yards, she says.
"We'll have a better service product, and one that's more proactive with customers," says Sanborn.
However, it'll be three years before the railroad can tap that service. The transportation department and other departments plan to implement TSI slowly in various phases through 2014 to ensure service changes made throughout the complicated network take hold for the long term, says Sanborn.
"We want to do it right instead of doing something quickly and gaining a small victory," she says.
First on the TSI-for-carloads agenda: visiting each customer's facility and completing a site survey so every CSX employee understands each customer's unique needs, says Sanborn.
"We ask them specific questions: Is car availability what you need? Is transit time your biggest concern?" she says. "We don't know if we don't ask. This won't make everyone happy and may not work for everybody, [but] it's a very broad effort."
After site surveys are completed, internal processes are improved and data accuracy is addressed, the transportation department plans to pilot redesigned services at various customer locations.
CSX attempted several similar initiatives for the carload network since the 1990s, but implementation was rushed and "it wasn't long before we were back to step No. 1," says Sanborn.
"We want to get the basic foundation correct, and then build onto it," she says.
Senior execs also are focusing on building a stronger foundation for intermodal business, which currently generates 35 percent of annual volume.
To drive intermodalism to the next level and take on more traffic, CSX needs to divert additional domestic truckloads in the East traveling more than 550 miles, senior execs say.
Of 14 million total truckload units that can be targeted in the East, CSX last year handled about 2.2 million and Norfolk Southern Railway, about 2.9 million. That leaves about 9 million truckloads available for diversion, says Vice President of Intermodal Bill Clement.
CSX can provide a broad market reach to divert traffic from trucks through wholesale channel partners, such as intermodal marketing companies and freight brokers, and enhance service reliability and flexibility to win some of the cargo, he says.
"You look at some of the issues facing the trucking industry, such as tight capacity, and it makes intermodal more popular," says Clement. "We're surrounded by global freight flows, and are best positioned to serve each [eastern U.S.] port."
In addition, the Class I can offer intermodal shippers a "hub and spoke" network branching east, west, south, southwest and southeast from northwest Ohio because of the North Baltimore, Ohio, terminal that opened earlier this year as part of the National Gateway, he says.
To be completed in 2015, the gateway calls for establishing a double-stack intermodal network between mid-Atlantic ports and Midwestern markets, including a new terminal in Louisville, Ky., that's set to open by year's end, a new one in Pittsburgh, and expanded terminals in Columbus, Ohio, and Charlotte, N.C.
Anchored by the Ohio facility — the gateway's "crown jewel" — the hub-and-spoke network provides a Chicago bypass for western interchange traffic, says Clement. Several years ago, intermodal execs determined CSX needed a third Chicago-area terminal in addition to the Bedford Park and 59th Street facilities. But they decided to build the terminal in northwest Ohio and stay away from congested Chicago, says Clement.
The northwest Ohio facility is not a traditional flat switching yard, which is labor intensive and requires a lot of time to switch cars, he says. The terminal features a "ladder" design with operations down the middle so it can serve as one large yard or two smaller yards.
Intermodal execs are analyzing potential sites in the southern portion of CSX's network for a future northwest Ohio-type terminal, says Clement.
In addition, sites are under consideration for a new central Florida terminal, and CSX execs are working with Maryland Department of Transportation and city of Baltimore officials to determine a site for a terminal between Baltimore and Washington, D.C.
In the meantime, the National Gateway's next step forward calls for expanding and improving the century-old Virginia Avenue Tunnel in D.C. In May, senior execs decided CSX should fund the project by committing $160 million; the Class I now has obligated about $575 million for the publicly and privately funded National Gateway.
To be completed in a few years, the Virginia Avenue Tunnel work — which involves clearances and double track — will help provide double-stack clearances in Maryland, West Virginia and D.C.
"When the National Gateway is completed, we will have double-stack clearances in almost all of the areas we want it," says Clement.
In addition, CSX plans to double the size of a yard in Worcester, Mass., to gain more capacity in the middle of the state and obtain double-stack clearance to Albany, N.Y. The project also will clear a line for commuter trains between Boston and Worcester.
Overall, the various intermodal projects will help increase CSX's marketshare from 38 percent to a percentage in the low 40s, says Clement.
The Class I already has increased its share of business with ocean shipping firm Maersk Line. Next year, CSX will handle the majority of Maersk Line's intermodal traffic, says Clement.
Maersk Line officials were impressed by CSX's recent efforts to build a small intermodal facility at one of the Class I's TRANSFLO terminals near Montreal — the first time the railroad built an intermodal facility in Canada, says Clement. The facility helps Maersk Line move traffic from Montreal to points in the U.S. Northeast, including Philadelphia.
"They weren't satisfied with other ways they tried to move the traffic," says Clement.
Just as CSX coal execs aren't satisfied with the status quo when it comes to export coal volumes. Coal traffic currently accounts for 25 percent of CSX's volume and 31 percent of total annual revenue, but healthy worldwide demand for U.S. metallurgical coal means export coal will continue to be a "strong growth story" for the railroad, senior execs say.
Last year, the railroad moved 30 million tons of export coal, matching a record set in 2008. But this year, volume is projected to shatter that record by reaching 40 million tons, says Chris Jenkins, VP of coal and automotive service groups.
"We're in the fifth or sixth year of explosive growth. There's demand in Europe, South Africa, Asia and China," he says. "China is producing vast quantities of steel and needs coke, and they can't source it all themselves."
In addition, India is projecting a 65 percent jump in import coal demand over the next five years, and Brazil lacks enough metallurgical coal to meet its steel production needs and considers the United States a natural, nearby supplier.
So, the railroad is trying to develop a network that can accommodate explosive demand, such as by debottlenecking coal facilities and adding capacity "across the board," says Jenkins.
For example, CSX doubled the number of workers at its Curtis Bay export coal terminal in Baltimore so the facility could improve throughput and dump more coal, says Jenkins.
In addition, the state of Alabama funded a project designed to increase a Mobile terminal's throughput while CSX spent capital to improve access; and line additions at Illinois Basin mines increased the railroad's access to the coal region.
CSX's base capacity is about 30 million to 35 million tons, but the recent capacity expansions have added about 15 million tons to the base.
The Class I also is trying to boost productivity to transport more export coal per train trip. Three years ago, the railroad transitioned to 110-car units trains from 90-car trains in the Southeast. Such efforts, along with the use of distributed power, have helped boost average tons per unit coal train 14 percent since 2004 from 10,011 to 11,421.
"We're operating longer trains with higher capacities per car. There's still room to go on higher tonnages," says Jenkins.
In addition, crews are trying to minimize time spent at destinations and pull empty trains as soon as they're available. CSX sources coal from about 125 origins and transports coal to about 200 destinations.
"We're working to improve the whole supply chain," says Jenkins.
Making wholesale improvements in many parts of CSX's organization is going to take a lot of work. And a lot of money. At the Detroit investor conference, Ward and his senior team committed to capital spending the next five years that will average 18 percent of total annual revenue — a level that will place each year's capex budget in the $1.8 billion-to-$2 billion range, which is about equal to the most dollars the Class I has ever spent on capital improvements.
"There will be some adjustments based on the economy," says Ward. "The investments will keep infrastructure strong and address growth in all areas."
Prior to Ward's tenure as CEO, operational and process changes didn't always pay off growth-wise or improvement-wise for the long haul, he says. However, over the past eight years, the Class I has instilled a "winning culture" that has netted more consistent and sustainable results, Ward believes.
"We were the best rationalizers before; we always had reasons why something worked for a while and then didn't work, or didn't work at all," says Ward. "One-third of our workforce has changed during my tenure, and a lot of them have five years or less of experience and don't know what the bad days were like."
Ward & Co. are hoping they never have to find out.
"Success breeds success," he says.
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