TAPPI Shipping, Receiving & Warehousing Workshop Chip Davis CSX TRANSPORTATION APRIL 28, 2009
CSX TRANSPORTATION OVERVIEW The largest railroad in eastern North America Service area includes all major markets in the eastern United States Covers 23 states, the District of Columbia, and two Canadian Provinces Connects to over 70 ports more ports than any other railroad Employs 32,000 dedicated individuals Operates a fleet of over 3,700 locomotives WHO IS CSXT? 2
THE RAIL INDUSTRY: PRE DE REGULATION U. S. Freight Railroad Performance At Staggers (1981 = 100) 300 250 200 150 100 50 Productivity Rates Volume Revenue Before de regulation: 1/5 of all rail track nationally in bankruptcy. Annual industry ROI at 2%. Standing derailments. 1/5 of national track operated at reduced speeds. RR market share of intercity freight down to 35%. Industry nationalization proposed. 0 '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 STATE OF THE RAILROAD 3
THE RAIL INDUSTRY: DE REGULATION (1980) U. S. Freight Railroad Performance At Staggers (1981 = 100) 300 Staggers Rail Act passed October (1980) Market based Pricing & Differential Pricing are born. 250 RRs and customers can now enter into confidential contracts. 200 RRs determine the most efficient routes. 150 100 Productivity Rates Streamlined procedures for rail lines sales to new shortlines. Expanded the ICC s authority to exempt categories of traffic from regulation. 50 Volume Revenue STB is established in 1995 to adjudicate rate disputes. The need for RRs to earn adequate revenues was explicitly recognized. 0 '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 STATE OF THE RAILROAD 4
THE RAIL INDUSTRY: POST DE REGULATION U. S. Freight Railroad Performance At Staggers (1981 = 100) 300 Post de regulation (2008) Mergers & consolidations. Pre de regulation Productivity 250 Rates reduced by 60%. 200 Accidents reduced by 2/3rds. Volume 150 Rail traffic has nearly doubled. 100 50 Productivity has tripled. Class I RRs reinvested $420 billion since 1980. Revenue Rates 0 '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 STATE OF THE RAILROAD 5
PROPOSAL TO INCREASE REGULATION The Railroad Competition and Service Improvement Act of 2007 Enhanced Competition or Re Regulation? Two versions introduced during the 110th Congress: House version: H. R. 2125 Senate version: S. 953 Jay Rockefeller (D WV) Chairman of the Senate Committee on Commerce, Science & Transportation Jim Oberstar (D MN) Chairman of the House Transportation & Infrastructure Committee STATE OF THE RAILROAD 6
ECONOMIC UNCERTAINTY REQUIRES FLEXIBILITY Global Economy U.S. Industrial Production Rail Pricing Industrial production forecasted to be down 7.6% in 2009 Prior plan was based on a 3.5% decline Fuel Prices Commodity Prices Automotive Demand Downward revisions to economic indicators continue Regulatory Outlook Access to Credit Markets Housing & Construction Demand Timing of an economic recovery is impossible to predict Prudent to reduce resources to current volume levels STATE OF THE RAILROAD 7
CSXT S S BUSINESS HAS BEEN IMPACTED BY THE ECONOMY Volume Change by Major Economic Driver Change in CSX Volume Economic Driver CSX Commodity Groups % of CSX Volume (31%) Industrial Production Chemicals Metals 11% (23%) Housing Starts Forest Products Emerging Markets 11% (20%) Consumer Spending Automotive Intermodal 34% (15%) Agriculture Related Agricultural Products Phosphates & Fertilizers Food & Consumer 14% (7%) Energy Production Coal 30% STATE OF THE RAILROAD 8
THE OUTLOOK HAS SHIFTED SINCE SEPTEMBER 2009 Economic Forecasts 1.0% 0.1% 0.8% Current Forecast (1.0%) (3.5%) (4.8%) (2.5%) (3.7%) (7.6%) (9.0%) (10.0%) (15.7%) Sep Forecast Nov Forecast Jan Forecast Mar Forecast Real GDP Industrial Production Imports 2009 Q1 FINANCIAL PERFORMANCE 9
THROUGH THE FIRST 10 WEEKS, VOLUME IS DOWN 18% 1,397 Volume (000) First Quarter to Date 1,332 1,314 Housing slump shows no signs of recovery near term 2009 light vehicle production at lowest rate in 27 years 1,072 Inventory correction expected to continue through Q1 2006 2007 2008 2009 Weak economy is driving lower global trade 2009 Q1 FINANCIAL PERFORMANCE 10
MERCHANDISE REVENUES ARE DOWN 20% RPU Volume Revenue First Quarter Year Over Year Change (23%) (20%) 3% First quarter highlights Steel production cut by half Phosphates decline significantly Housing starts and overall construction remains weak 30% 39% First Quarter Volume 31% Merchandise Categories Agriculture Housing Industrial Ongoing drivers Industrial sector, housing and construction to remain weak U.S. infrastructure needs provide some opportunity 2009 Q1 FINANCIAL PERFORMANCE 11
COAL REVENUES ARE DOWN 2% RPU Volume Revenue First Quarter Year Over Year Change 10% 13% (7%) 77% (2%) Coal Categories Utility Export 5% First quarter highlights Weakness in export and utility coal shipments Significant decline in steel related coal, coke and iron ore Ongoing drivers Lower energy demand; utility stock piles are growing Natural gas costs declining First Quarter Volume Other 2009 Q1 FINANCIAL PERFORMANCE 12
AUTOMOTIVE REVENUES ARE DOWN 53% RPU First Quarter Year Over Year Change 0% First quarter highlights Volumes impacted by lower demand and tight credit Plant shutdowns continue Volume Revenue (53%) (53%) Ongoing drivers Lower consumer demand 44% 56% Automotive Categories Big-3 Inventory levels still at nearly 100 days for the Big 3 Big 3 restructuring uncertainty New Domestics First Quarter Volume 2009 Q1 FINANCIAL PERFORMANCE 13
INTERMODAL REVENUES ARE DOWN 22% RPU Volume First Quarter Year Over Year Change (13%) (10%) First quarter highlights Significant decline in imports with flat domestic volume RPU lower due to fuel recovery and competitive trucking prices Revenue (22%) Ongoing drivers 42% 58% Intermodal Categories Domestic Lower global trade and consumption levels Highly competitive truck market International First Quarter Volume 2009 Q1 FINANCIAL PERFORMANCE 14
RAILROADS REMAIN MOST CAPITAL INTENSIVE INDUSTRY Capital Spending as a Percent of Revenue Railroads Utilities Minerals Electronics Paper Chemicals Metals Lumber Automotive Food 2% 3% 3% 3% 4% 4% 5% 5% 13% 17% Source: Oliver Wyman based on 1997 2006 average data INFRASTRUCTURE INVESTMENTS 15
CAPITAL PLAN IS ALIGNED WITH STRATEGIC OBJECTIVES 2009 2011 Capital Investment $5 Billion 9% 9% 6% 6% 70% Infrastructure Locomotives Freight Cars Strategic Positive Train Control Continues required investment in track infrastructure Focuses on locomotive rebuilds to extend life and improve reliability Invests in higher capacity, more productive cars in key markets Includes strategic capital for growth and productivity Starts positive train control (PTC) implementation to comply with regulatory mandate INFRASTRUCTURE INVESTMENTS 16
CSXT S S 2009 CAPITAL BUDGET BREAKDOWN 2009 Capital Budget $1.6 Billion 9% 10% 10% 71% Infrastructure Freight Cars Locomotives Strategic INFRASTRUCTURE INVESTMENTS 17
CSXT IS PROACTIVELY ADJUSTING SERVICE TO LOWER VOLUME REQUIREMENTS 180 Train Network Adjustments Carload Volume and Road Crew Starts 17 Carloads (000) 160 140 120 100 80 YOY volume down 2% 5% YOY volume down 15% 20% 15 13 11 9 7 Road Crew Starts (000) 60 40 41 42 43 44 45 46 47 48 49 50 51 52 1 2 3 4 5 6 Week 5 Carloads Road Crew Starts SERVICE EXPECTATIONS: TRAIN SERVICE 18
CSXT IS RIGHTSIZING ITS RESOURCES Active Locomotives Active T&E Employees 4,200 13,200 4,100 4,000 12,700 3,900 3,800 12,200 3,700 3,600 11,700 3,500 3,400 11,200 3,300 3,200 Down 15% since early October 10,700 Down 14% since early October 3,100 10,200 40 43 46 49 52 3 6 9 40 43 46 49 52 3 6 9 Week Week SERVICE EXPECTATIONS: TRAIN SERVICE 19
CSXT S S ONE PLAN REDEFINES THE TRAIN PLAN Improved network, service and execution requires a One Plan redesign: CSX is a different railroad versus 2004 when One Plan was originally implemented Traffic volume and pattern shifts also provide opportunity for adjustments Merchandise Traffic Automotive Traffic Focus remains on maximizing service and efficiency Reduce train starts, terminal handlings and route miles Increase car velocity SERVICE EXPECTATIONS: TRAIN SERVICE 20
CSXT HAS ADJUSTED ITS RESOURCES TO IMPROVE ITS OVERALL SERVICE PERFORMANCE Network Performance Service Reliability Train Velocity (mph) On-time Originations 20.0 20.1 20.8 21.6 74% 74% 79% 83% Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2006 Q1 2007 Q1 2008 Q1 2009 26.1 Terminal Dwell (hours) 24.5 22.7 24.1 61% On-time Arrivals 64% 69% 79% Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2006 Q1 2007 Q1 2008 Q1 2009 SERVICE EXPECTATIONS: LOCAL SWITCHING 21
EFFECTS ON CSXT S CUSTOMER SERVICE NEEDS The need for CSXT s Customer Service department has only increased as a result of the down economy. Customers are moving fewer cars in their pipelines. Therefore, the proper movement of each railcar in the network is even more critical. SERVICE EXPECTATIONS: CUSTOMER SERVICE STAFFING 22
SERVICE QUALITY IS DRIVING CUSTOMER SATISFACATION Customer Satisfaction Overall Score CSXT s overall rating remains near historical high 6.3 6.4 7.0 6.8 2005 2006 2007 2008 CSX Truck Other Railroads Note: Results based on an independent third party study of CSX customers Satisfaction continues to lead the peer group average Rails continue to close the service gap with trucks SERVICE EXPECTATIONS: CUSTOMER SERVICE STAFFING 23
THE INHERENT NATURE OF BOXCAR BUSINESS Many Types of Customers/Products Batch Network vs. Unit Train Truck and Rail Competitive Truck Rates Lower Intermodal conversion Poor Utilization Costly to Replace BOXCAR EQUIPMENT OUTLOOK 24
THE NORTH AMERICAN BOXCAR POOL (NABP) Pool of approximately 7,800 Boxcars Creates efficiency among members Like Characteristics: 70 Ton / Plate C Participating Carriers: CSXT, NS, UP, BNSF, CPR, KCS, FXE, KCSM Grade A Condition can only handle Grade A Commodities Managed as a common pool Is oversized in proportion to business levels Is still very complex (but getting better) New builds will be slow and later increase BOXCAR EQUIPMENT OUTLOOK 25
2057 CSXT S S BOXCAR FLEET IS LARGE North American Boxcar Fleet Fallout Year 30,000 25,000 20,000 15,000 10,000 5,000 0 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 Source: UMLER BOXCAR EQUIPMENT OUTLOOK 26
CSXT S S STRATEGY: REDUCING TO TWO VARIETIES Length 50 52 60 86 RBL Canstock Reefer 50 Plate F Cushion 12 Plug Rigid Cushion Doors Plug Slider Combo Widths Plate Capacity 60 Plate F Cushion Double 8 Plug BOXCAR EQUIPMENT OUTLOOK 27
CSXT S S FOCUS DURING THESE HARD TIMES Focus on converting freight from congested highways to rail Continue to reinvest for the future Listen to the customer & cultivate relationships Seek outside funding when possible Remain flexible and creative SUMMARY 28
LONGER TERM DRIVERS FOR DEMAND STILL SEEM VALID Industrial Production Population Consumption Transportation Demand Global Trade SUMMARY 29
FINAL THOUGHTS The rail industry has changed significantly since it became deregulated in 1980. The markets are uncertain and there is no good way to predict the future. CSXT is positioning itself for recovery by continuing to Invest its capital in infrastructure and equipment Remain flexible and creative Right results, right way SUMMARY 30