We’re very fortunate to have a broad reach into corporate America and many of the best minds in business today. We recently discussed some macro issues with Oscar Munoz, CFO of CSX. The rail industry is one of the very best indicators of economic growth and CSX is a leader in this important sector of the global economy. Oscar was kind enough to share his opinions on the rail industry and what CSX sees in store for the macro economy going forward:
Cullen Roche: There are few indicators that are more foreshadowing of economic growth than the rail industry. We’ve seen a fairly robust rebound in rail traffic trends since 2009, but volumes have been a bit more volatile in early 2011. What do you think the rail industry is telling us about the global economy today and what does CSX’s business say about the current state of the US economy?
Oscar Munoz: We continue to see positive economic trends in an expanding economy, supporting profitable growth across all major markets that we serve. Looking ahead, both discussions with our customers and review of key leading indicators suggest healthy economic growth will continue throughout 2011 and beyond.
CSX’s overall volume growth in the first quarter increased 7 percent versus the same period last year. Although the industry experienced some limited volume volatility due to weather in the first quarter, global and domestic demand is strong.
CSX’s volume continues to grow in nearly all of our markets, led by expansion of our intermodal business; increased shipments within most of our merchandise markets, including automotive, emerging markets, and forest products; and greater demand for export coal.
Cullen Roche: CSX is in a unique position to benefit from the current environment of surging commodities and a recovering global economy. Can you explain why you believe CSX is uniquely positioned to benefit in the current tumultuous global economy?
Oscar Munoz: We certainly do have a unique vantage point when it comes to changes in the American economy – and the global economy as well. CSX’s business is diversified across almost every product that industrial America needs. This business model drives a number of benefits for us in an expanding economy and also helps us to weather shifts in supply and demand across the global economy.
Industrial products and inputs, such as metals, plastics, and intermediate goods are in greater demand as the manufacturing sector increases production to meet the needs of a growing population. Not surprisingly, shipments of finished products are also on the rise. For example, automobile volume for CSX increased 20% year-over-year in the first quarter alone.
We continue to see strong growth in our intermodal market. Intermodal revenue increased 4 percent on record first quarter volumes. Of that total intermodal business, international volume grew 24 percent due to the strengthening U.S. economy and the addition of new international customers as a result of expanded service and network offerings.
As the world supply of coal tightens and demand increases in developing countries, the U.S. is positioned as a stable supplier and has strong reserves of metallurgical coal. Europe remains the largest importer of U.S. coal; however Asia’s demand is growing rapidly and expected to continue, as are shipments to South America.
Cullen Roche:There has been much controversy over the Fed’s stance on monetary policy. Has CSX noticed any direct impact from the Fed’s current stance on monetary policy, either positive or negative?
Oscar Munoz: Although monetary policy is one factor that can influence global macroeconomic trends, true changes in supply and demand have a greater influence on CSX. As mentioned above, we are in the business of moving the goods that people, companies and manufacturers need. A growing global economy and the evolution of the global supply chain are major factors in the increasing demand for CSX services.
Cullen Roche:Europe and China are important drivers of future growth for the rail industry. How has the Euro crisis and the Chinese inflation threat impacted CSX – if at all?
Oscar Munoz: Fluctuation in international currency, like changes in the American dollar, impacts our business much less than changes in actual demand. We continue to see strong demand for steam coal shipments to Europe despite the Euro crisis. As mentioned above, while Europe remains the largest importer of U.S. coal, Asia’s demand is growing rapidly and we continue to see Asia as one of our key growth markets.
Cullen Roche:Margin compression has become an increasing concern as unit labor costs begin to rise again and commodity price pressures grow. CSX has managed costs extraordinarily well in recent quarters. How serious is the threat of margin compression to CSX and growth going forward?
Oscar Munoz: Cost management is vital in any industry and CSX is delivering strong incremental margins. Our employees are driving technological and process improvements across the company. While cost pressures are plentiful, our focus has been to ensure our service product continues to improve – allowing us to price to the value of the service we provide – while expanding market share. Confidence in our approach is the foundation of our long-term guidance of achieving a 35% operating margin by 2015, up from 29% today.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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