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TAPPI Shipping, Receiving & Warehousing Workshop TAPPI Shipping, Receiving & Warehousing Workshop

Chip Davis Chip Davis CSX TRANSPORTATION CSX TRANSPORTATION APRIL 28, 2009 APRIL 28, 2009

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CSX TRANSPORTATION OVERVIEW 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? WHO IS CSXT?

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Before de Before de‐ ‐regulation: 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.

50 100 150 200 250 300 '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07

THE RAIL INDUSTRY: PRE DE THE RAIL INDUSTRY: PRE DE‐ ‐REGULATION REGULATION

STATE OF THE RAILROAD STATE OF THE RAILROAD

• U. S. Freight Railroad Performance At Staggers
• U. S. Freight Railroad Performance At Staggers

(1981 = 100)

Productivity Productivity Rates Rates Volume Volume Revenue Revenue

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50 100 150 200 250 300 '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07

THE RAIL INDUSTRY: DE THE RAIL INDUSTRY: DE‐ ‐REGULATION (1980) REGULATION (1980)

STATE OF THE RAILROAD STATE OF THE RAILROAD

• “Market‐based Pricing” & “Differential Pricing” are born.
• RRs and customers can now enter into confidential

contracts.

• RRs determine the most efficient routes.
• Streamlined procedures for rail lines sales to new

shortlines.

• Expanded the ICC’s authority to exempt categories of traffic

from regulation.

• STB is established in 1995 to adjudicate rate disputes.
• The need for RRs to earn adequate revenues was explicitly

recognized.

Staggers Rail Act passed October (1980) Staggers Rail Act passed October (1980)

• U. S. Freight Railroad Performance At Staggers
• U. S. Freight Railroad Performance At Staggers

(1981 = 100)

Productivity Productivity Rates Rates Volume Volume Revenue Revenue

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Post de Post de‐ ‐regulation (2008) regulation (2008)

• Mergers & consolidations.
• Rates reduced by 60%.
• Accidents reduced by

2/3rds.

• Rail traffic has nearly

doubled.

• Productivity has tripled.
• Class I RRs reinvested $420

billion since 1980. 50 100 150 200 250 300 '65 '68 '71 '74 '77 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07

THE RAIL INDUSTRY: POST DE THE RAIL INDUSTRY: POST DE‐ ‐REGULATION REGULATION

STATE OF THE RAILROAD STATE OF THE RAILROAD

Productivity Productivity Volume Volume Revenue Revenue Rates Rates

• U. S. Freight Railroad Performance At Staggers
• U. S. Freight Railroad Performance At Staggers

(1981 = 100)

Pre de Pre de‐ ‐regulation regulation

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PROPOSAL TO INCREASE REGULATION PROPOSAL TO INCREASE REGULATION

STATE OF THE RAILROAD STATE OF THE RAILROAD

• 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

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ECONOMIC UNCERTAINTY REQUIRES FLEXIBILITY ECONOMIC UNCERTAINTY REQUIRES FLEXIBILITY

• Industrial production forecasted to be

down 7.6% in 2009

– Prior plan was based on a 3.5% decline

• Downward revisions to economic

indicators continue

• Timing of an economic recovery is

impossible to predict

– Prudent to reduce resources to current volume levels Global Economy Global Economy Fuel Prices Fuel Prices Regulatory Outlook Regulatory Outlook U.S. Industrial Production U.S. Industrial Production Commodity Prices Commodity Prices Access to Credit Markets Access to Credit Markets Rail Pricing Rail Pricing Automotive Demand Automotive Demand

Housing & Construction Demand Housing & Construction Demand

STATE OF THE RAILROAD STATE OF THE RAILROAD

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% of CSX Volume 34% 11% 11% 14% 30% Industrial Production Chemicals Metals Housing Starts Forest Products Emerging Markets Consumer Spending Automotive Intermodal Agriculture Related Agricultural Products Phosphates & Fertilizers Food & Consumer Energy Production Coal Economic Driver CSX Commodity Groups Change in CSX Volume

Volume Change by Major Economic Driver

(7%) (15%) (20%) (23%) (31%)

STATE OF THE RAILROAD STATE OF THE RAILROAD

CSXT CSXT’ ’S BUSINESS HAS BEEN IMPACTED BY THE ECONOMY S BUSINESS HAS BEEN IMPACTED BY THE ECONOMY

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2009 Q1 FINANCIAL PERFORMANCE 2009 Q1 FINANCIAL PERFORMANCE

THE OUTLOOK HAS SHIFTED SINCE SEPTEMBER THE OUTLOOK HAS SHIFTED SINCE SEPTEMBER

Current Forecast

2009 Economic Forecasts

1.0% (1.0%) (2.5%) (3.7%) 0.1% (3.5%) (7.6%) 0.8% (4.8%) (9.0%) (15.7%) (10.0%)

Sep Forecast Nov Forecast Jan Forecast Mar Forecast

Real GDP Industrial Production Imports

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2009 Q1 FINANCIAL PERFORMANCE 2009 Q1 FINANCIAL PERFORMANCE

Volume (000) First Quarter‐to‐Date

1,397 1,332 1,314 1,072

2006 2007 2008 2009

THROUGH THE FIRST 10 WEEKS, VOLUME IS DOWN 18% THROUGH THE FIRST 10 WEEKS, VOLUME IS DOWN 18%

• Housing slump shows no

signs of recovery near‐term

• 2009 light vehicle production

at lowest rate in 27 years

• Inventory correction

expected to continue through Q1

• Weak economy is driving

lower global trade

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2009 Q1 FINANCIAL PERFORMANCE 2009 Q1 FINANCIAL PERFORMANCE

MERCHANDISE REVENUES ARE DOWN 20% MERCHANDISE REVENUES ARE DOWN 20%

First Quarter Year‐Over‐Year Change

(20%) (23%) 3%

Revenue Volume RPU

• First quarter highlights
• Steel production cut by half
• Phosphates decline

significantly

• Housing starts and overall

construction remains weak

• Ongoing drivers
• Industrial sector, housing

and construction to remain weak

• U.S. infrastructure needs

provide some opportunity

Agriculture Housing Industrial 39% 39% 31% 31% 30%

Merchandise Categories

First Quarter Volume

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2009 Q1 FINANCIAL PERFORMANCE 2009 Q1 FINANCIAL PERFORMANCE

COAL REVENUES ARE DOWN 2% COAL REVENUES ARE DOWN 2%

First Quarter Year‐Over‐Year Change

(2%) (7%) 5%

Revenue Volume RPU

• First quarter highlights
• Weakness in export and

utility coal shipments

• Significant decline in steel

related coal, coke and iron

• re
• Ongoing drivers
• Lower energy demand;

utility stock piles are growing

• Natural gas costs declining

Utility Export Other

Coal Categories

77% 77% 13% 13% 10%

First Quarter Volume

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2009 Q1 FINANCIAL PERFORMANCE 2009 Q1 FINANCIAL PERFORMANCE

AUTOMOTIVE REVENUES ARE DOWN 53% AUTOMOTIVE REVENUES ARE DOWN 53%

• First quarter highlights
• Volumes impacted by lower

demand and tight credit

• Plant shutdowns continue
• Ongoing drivers
• Lower consumer demand
• Inventory levels still at nearly

100 days for the Big 3

• Big‐3 restructuring uncertainty

First Quarter Year‐Over‐Year Change

(53%) (53%) 0%

Revenue Volume RPU

Big-3 New Domestics

Automotive Categories

First Quarter Volume

56% 56% 44% 44%

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2009 Q1 FINANCIAL PERFORMANCE 2009 Q1 FINANCIAL PERFORMANCE

INTERMODAL REVENUES ARE DOWN 22% INTERMODAL REVENUES ARE DOWN 22%

• First quarter highlights
• Significant decline in imports

with flat domestic volume

• RPU lower due to fuel recovery

and competitive trucking prices

• Ongoing drivers
• Lower global trade and

consumption levels

• Highly competitive truck

market

First Quarter Year‐Over‐Year Change

(22%) (13%) (10%)

Revenue Volume RPU

Domestic International 58% 58% 42% 42%

Intermodal Categories

First Quarter Volume

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INFRASTRUCTURE INVESTMENTS INFRASTRUCTURE INVESTMENTS

RAILROADS REMAIN MOST CAPITAL INTENSIVE INDUSTRY RAILROADS REMAIN MOST CAPITAL INTENSIVE INDUSTRY

Capital Spending as a Percent of Revenue

2% 3% 3% 3% 4% 4% 5% 5% 13% 17%

Food Automotive Lumber Metals Chemicals Paper Electronics Minerals Utilities Railroads

Source: Oliver Wyman based on 1997 – 2006 average data

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INFRASTRUCTURE INVESTMENTS INFRASTRUCTURE INVESTMENTS

CAPITAL PLAN IS ALIGNED WITH STRATEGIC OBJECTIVES CAPITAL PLAN IS ALIGNED WITH STRATEGIC OBJECTIVES

70% 9% 6% 6% 9% Infrastructure

• 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

Locomotives Strategic Freight Cars Positive Train Control

2009‐2011 Capital Investment $5 Billion

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INFRASTRUCTURE INVESTMENTS INFRASTRUCTURE INVESTMENTS

CSXT CSXT’ ’S 2009 CAPITAL BUDGET BREAKDOWN S 2009 CAPITAL BUDGET BREAKDOWN

10%

2009 Capital Budget $1.6 Billion

Infrastructure Locomotives Strategic Freight Cars 71% 9% 10%

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YOY volume down 2% – 5% YOY volume down 15% – 20%

Train Network Adjustments Carload Volume and Road Crew Starts

60 80 100 120 140 160 180

40 41 42 43 44 45 46 47 48 49 50 51 52 1 2 3 4 5 6

Week

Carloads (000)

5 7 9 11 13 15 17

Road Crew Starts (000)

Carloads Road Crew Starts

SERVICE EXPECTATIONS: TRAIN SERVICE SERVICE EXPECTATIONS: TRAIN SERVICE

CSXT IS PROACTIVELY ADJUSTING SERVICE TO LOWER CSXT IS PROACTIVELY ADJUSTING SERVICE TO LOWER VOLUME REQUIREMENTS VOLUME REQUIREMENTS

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Active Locomotives

3,100 3,200 3,300 3,400 3,500 3,600 3,700 3,800 3,900 4,000 4,100 4,200

40 43 46 49 52 3 6 9 Week

SERVICE EXPECTATIONS: TRAIN SERVICE SERVICE EXPECTATIONS: TRAIN SERVICE

CSXT IS RIGHTSIZING ITS RESOURCES CSXT IS RIGHTSIZING ITS RESOURCES

Active T&E Employees

10,200 10,700 11,200 11,700 12,200 12,700 13,200

40 43 46 49 52 3 6 9 Week

Down 15% since early October Down 15% since early October Down 14% since early October Down 14% since early October

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SERVICE EXPECTATIONS: TRAIN SERVICE SERVICE EXPECTATIONS: TRAIN SERVICE

CSXT CSXT’ ’S ONE PLAN S ONE PLAN REDEFINES REDEFINES THE TRAIN PLAN THE TRAIN PLAN

Merchandise Traffic Automotive Traffic

• 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

• Focus remains on maximizing

service and efficiency – Reduce train starts, terminal handlings and route miles – Increase car velocity

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SERVICE EXPECTATIONS: LOCAL SWITCHING SERVICE EXPECTATIONS: LOCAL SWITCHING

CSXT HAS ADJUSTED ITS RESOURCES TO IMPROVE ITS CSXT HAS ADJUSTED ITS RESOURCES TO IMPROVE ITS OVERALL SERVICE PERFORMANCE OVERALL SERVICE PERFORMANCE

Network Performance Service Reliability

Train Velocity (mph)

20.0 20.1 20.8 21.6

Q1 2006 Q1 2007 Q1 2008 Q1 2009

Terminal Dwell (hours)

26.1 24.5 22.7 24.1

Q1 2006 Q1 2007 Q1 2008 Q1 2009

On-time Originations

74% 74% 79% 83%

Q1 2006 Q1 2007 Q1 2008 Q1 2009

On-time Arrivals

61% 64% 69% 79%

Q1 2006 Q1 2007 Q1 2008 Q1 2009

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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 SERVICE EXPECTATIONS: CUSTOMER SERVICE STAFFING

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SERVICE EXPECTATIONS: CUSTOMER SERVICE STAFFING SERVICE EXPECTATIONS: CUSTOMER SERVICE STAFFING

SERVICE QUALITY IS DRIVING CUSTOMER SATISFACATION SERVICE QUALITY IS DRIVING CUSTOMER SATISFACATION

Customer Satisfaction Overall Score

6.3 6.4 7.0 6.8 2005 2006 2007 2008

CSX Truck Other Railroads

• CSXT’s overall rating

remains near historical high

• Satisfaction continues

to lead the peer group average

• Rails continue to close

the service gap with trucks

Note: Results based on an independent third‐party study of CSX customers

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BOXCAR EQUIPMENT OUTLOOK BOXCAR EQUIPMENT OUTLOOK

THE INHERENT NATURE OF BOXCAR BUSINESS 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

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BOXCAR EQUIPMENT OUTLOOK BOXCAR EQUIPMENT OUTLOOK

THE NORTH AMERICAN BOXCAR POOL (NABP) 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

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5,000 10,000 15,000 20,000 25,000 30,000

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057

North American Boxcar Fleet ‐ Fallout Year

Source: UMLER

CSXT CSXT’ ’S BOXCAR FLEET IS LARGE S BOXCAR FLEET IS LARGE

BOXCAR EQUIPMENT OUTLOOK BOXCAR EQUIPMENT OUTLOOK

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CSXT CSXT’ ’S STRATEGY: REDUCING TO TWO VARIETIES S STRATEGY: REDUCING TO TWO VARIETIES

BOXCAR EQUIPMENT OUTLOOK BOXCAR EQUIPMENT OUTLOOK

Length 50’ 52’ 60’ 86’ Rigid Cushion Doors Plug Slider Combo Widths 50’ Plate F Cushion 12’ Plug 60’ Plate F Cushion Double 8’ Plug RBL Canstock Reefer Plate Capacity

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CSXT CSXT’ ’S FOCUS DURING THESE HARD TIMES 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 SUMMARY

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LONGER LONGER‐ ‐TERM DRIVERS FOR DEMAND STILL SEEM VALID TERM DRIVERS FOR DEMAND STILL SEEM VALID

Population Population Consum ption Consum ption Transportation Transportation Dem and Dem and Global Trade I ndustrial Production SUMMARY SUMMARY

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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 SUMMARY