CSX Corp  (NASDAQ: CSX) Q1 2020 Earnings Call Transcript

CSX Corp  (CSX) Q1 2020 earnings call dated Apr. 22, 2020

Corporate Participants:

Bill Slater — Head of Investor Relations

James M. Foote — President And Chief Executive Officer

Kevin S. Boone — Executive Vice President And Chief Financial Officer

Mark K. Wallace — Executive Vice President Of Sales And Marketing

Jamie Boychuk — Executive Vice President Of Operations

Analysts:

Amit Mehrotra — Deutsche Bank — Analyst

Brandon Oglenski — Barclays — Analyst

Allison Landry — Credit Suisse — Analyst

Tom Wadewitz — UBS — Analyst

Brian Ossenbeck — JPMorgan — Analyst

Ken Hoexter — Bank of America — Analyst

Chris Wetherbee — Citi — Analyst

Scott Group — Wolfe Research — Analyst

David Ross — Stifel — Analyst

Jordan Alliger — Goldman Sachs — Analyst

Justin Long — Stephens — Analyst

David Vernon — Bernstein — Analyst

Walter Spracklin — RBC Capital Markets — Analyst

Jason Seidl — Cowen — Analyst

Jon Chappell — Evercore ISI — Analyst

Cherilyn Radbourne — TD Securities — Analyst

Ravi Shanker — Morgan Stanley — Analyst

Presentation:

Operator

Good afternoon, ladies and gentlemen and welcome to the CSX Corporation Q1 2020 Earnings Call. [Operator Instructions]

Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]

For opening remarks and introduction, I would like to turn the call over to Mr. Bill Slater, Head of Investor Relations for CSX Corporation.

Bill Slater — Head of Investor Relations

Thank you and good afternoon everyone. Joining me on today’s call are Jim Foote, President and Chief Executive Officer; Mark Wallace, Executive Vice President of Sales and Marketing; Kevin Boone, Chief Financial Officer; and Jamie Boychuk, Executive Vice President of Operations.On slide two is our forward looking disclosure, followed by our non-GAAP disclosure on slide three.

With that, it is my pleasure to introduce President and Chief Executive Officer, Jim Foote.

James M. Foote — President And Chief Executive Officer

Thanks Bill and thank you all for joining our call today. Before I get into the details of the first quarter, I want to say that our thoughts are with those who have been affected by the virus. No one ever imagined that we would be dealing with anything like this, but to see people everywhere respond to the challenge is uplifting.

With the beginning of the transformation of CSX, just a few years ago, we adopted a few tenets by which to operate. First, be safe. The employees should never be injured while on the job. Second, help our customers be successful by providing them with good service. And third, operate as efficiently as possible.We knew that if we did those three things, we would be a great company and shareholders would be rewarded. We clearly did not change how we operate with the pandemic in mind. But because of the intense adoption of those core beliefs, CSX is now a much stronger and resilient company and in the best possible position to respond to this unprecedented and uncertain environment.

I am incredibly proud of the men and women of CSX who are working on the front lines. They have once again shown what outstanding railroaders they are. CSX is running at peak condition, keeping the nation’s supply chain moving and delivering critical products to millions of Americans.Thousands of customers trust CSX with their freight and every one of them right now is experiencing some degree of disruption. And we are deeply committed to maintain the best-in-class service they have come to expect from us. I’m proud to say that service is currently the best it has ever been.

Now, let’s go to slide five of the presentation for highlights of the first quarter financial performance. First quarter EPS declined 2% to $1, while the operating ratio improved by 80 basis points to 58.7, a new Class I railroad first quarter record.Given the combination of the known headwinds this year from export coal and other non-core items as well as the initial impact from the pandemic in the final weeks of the quarter, these results are impressive. Moving to slide six. First quarter revenue declined 5% as merchandise growth was more than offset by declines in coal and other revenue. Merchandise revenue increased 3% on 2% higher volumes as broad-based volume growth across markets was partially offset by declines in automotive and fertilizers. Excluding automotive, merchandise revenue and volume were up 5% and 4%, respectively.

Intermodal revenue declined 1% on flat volumes, as domestic revenue and volume growth was more than offset by declines in the international business. Excluding the COVID-19 impact from the final weeks of the quarter, international volume would have been positive as well. Coal revenues decreased 25% on 15% lower volumes. Both the domestic and export markets continue to be negatively impacted by natural gas prices, weak export demand and benchmark prices.Other revenue declined 40% representing a 2% headwind to total revenue, due to lapping a favorable customer contract settlement last year and lower demurrage and intermodal storage revenues.

Turning to slide seven and our safety performance, where we again showed improvement. This quarter was one of the safest in CSX’s history. The personal injury rate declined 22%, and the train accident rate declined 34%, with both figures approaching all-time company records. Let’s now turn to slide eight and review our operating performance. CSX continued to operate at an extremely high level during what is typically the most seasonally difficult quarter. Setting first quarter records for velocity, dwell and car miles per day. Additionally, CSX continues to lead U.S. Class I railroads in fuel efficiency, operating at one gallon of fuel per 1,000 gross ton miles. Improving fuel efficiency is a top priority for the team, and we are proud of our success.

Fuel efficiency initiatives over the last several years have reduced annual diesel consumption by approximately 60 million gallons. The emissions avoided from this reduction are the equivalent of planting almost one million acres of forest each year. And we are challenging ourselves to be even better. CSX recently became the first U.S. Class I railroad to have its long-term emission intensity reduction goal approved by the science-based target initiative. Reducing emissions is important to us, our customers and the communities we serve.

Critically, as shown on slide nine, our operating performance continues to drive best-in-class service and reliability for our customers. The plant performance is the best, it has ever been with 84% of merchandise carloads and 98% of intermodal containers currently meeting their hourly trip plans in April so far. This performance includes the implementation of substantial service design changes in recent weeks to adjust our network in response to the current lower volumes.

Let me turn it over now to Kevin for more detail on the quarter.

Kevin S. Boone — Executive Vice President And Chief Financial Officer

Thank you, Jim, and good afternoon, everyone. As you will see in my review of the first quarter financial results, CSX was once again able to drive significant efficiency gains, posting yet another quality operating ratio record by the topline headwinds Jim described. This quarter marks three years since the transformation of CSX, and while there remains considerable uncertainty around the severity and duration of the economic impact related to the pandemic, CSX has never been in a stronger position to take its unique challenge.

Our liquidity position is extremely strong, with nearly $2.5 billion of cash and short-term investments at the end of March. This represents multiples of what we would consider normal, targeted cash levels. You can also imagine we have run quite a few scenarios over the past several weeks. Every model we run has us with substantial liquidity, emerging in a stronger position from this downturn and leveraging the subsequent recovery.

All of these scenarios assume we react and adapt our business to changing conditions, and we have already begun to quickly adjust to the current environment. From a financial perspective, we have taken many proactive steps to position the company to endure the economic downturn. First, we have ensured our cash position is liquid and available, shifting the majority of our cash investment to safer government funds for the time being. While, I would like to be earning more on our cash, we have taken a very conservative position until we are comfortable conditions have normalized.

We also raised an incremental $500 million of debt, taking advantage of what our historically low interest rates. When I look out over the next 36 months, we have less than $1 billion in debt maturities, which could easily be funded through our annual free cash flow. We continue to closely monitor our receivable balance and investing any significant change to our aging profile. Our transportation services remain critical to our customers and their ability to generate cash flow.

Finally, while the current backdrop is challenging, we are realizing opportunities and efficiencies that we will be able to leverage when we return to growth. These environments provide an opportunity to evaluate every cost and challenge the way we do things. And I expect these savings to be durable when growth returns. Now turning my attention to slide 11. I’ll walk you through the highlights of the summary income statement. As Jim mentioned, total revenue was down 5% in the first quarter. A significant decline in coal, lower other revenue and unfavorable mix more than offset the benefit of merchandise gains.

Moving to expenses. Total operating expenses were 7% lower in the first quarter, driven almost entirely by the strong gains in operating efficiency, we once again delivered. Labor and fringe expense was 10% lower versus the first quarter of 2019 as the average employee count was down 1,600 or 7%. Notably, even with volumes roughly flat year-over-year in the first quarter, we continue to find opportunities to tighten the train plan. First quarter crew starts were down 11% versus the prior year. This is a year-over-year average for the quarter and reflects efficiency gains we made over the last 12 months. Starting in the second half of March and through April to-date, we have reacted to the declining volume environment and have continued to aggressively reduce train starts. I’m sure Jim will touch on this in the Q&A.

I have also talked a lot about our focus on overtime the last few quarters. And once again, we saw a significant 33% reduction year-over-year. With current volume headwinds, we expect to continue to drive significant improvement in overtime spend. In addition to these gains and employee efficiency, we also had $14 million of lower incentive comp expense in the quarter. Finally, $10 million of other labor cost increases were primarily driven by the cycling of the railroad retirement tax refunds in the prior year.

MS&O expense improved 4% versus the prior year. Continued efficiency improvements across the operating support departments, including significant reductions in engineering, contracted spend, terminal expense and crew travel, drove a $32 million reduction year-over-year in MS&O. While MS&O is traditionally less volume variable and labor costs, a month ago, we began to work to eliminate discretionary spending across the company. Most of what will show up on this line item.

Reductions in active locomotives and freight cars will also drive MS&O savings. And we expect the outsourced terminal costs to adjust down as well. While MS&O will not be down one-for-one with volume, we are clearly focused on costs within this bucket that are traditionally less volume variable. Real estate and line sale gains of $18 million were $9 million lower in the quarter. While there continues to be a pipeline of these opportunities, sales activity is likely to be lower over the balance of the year, given current economic conditions. That said, we have already closed one transaction in April and expect gains in the second quarter to be relatively flat with the first quarter.

Fuel expense was $41 million favorable, an 18% improvement year-over-year, driven by a 12% decrease in the per gallon price as well as significant efficiency improvements and lower volume.Our continued focus on utilization of distributed power and energy management software, combined with train handling rules compliance for the first quarter of record fuel efficiency.Looking at other expenses, depreciation increased $14 million or 4% in the quarter. This reflects a $10 million impact from the fourth quarter 2019 depreciation study, which will continue to impact year-over-year depreciation expense for the next two quarters. We still expect full year depreciation to be up $50 million to $60 million.

Equipment rents expense decreased 8%. Improved network performance has enabled faster car cycle-times as measured by merchandise and intermodal days per load, which improved 6% and 13%, respectively. This combined with lower payable volumes with the majority of the savings and equipment rents.Going forward, we will see volume-related reductions in equipment rent expense. So, these will be partially offset by lower car utilization. In addition, we expect lower equity earnings from our TTX affiliate, which also show up in equipment rents.

Turning below the line. Interest expense increased primarily due to higher debt balances, partially offset by a lower all-in coupon. Income tax expense increased $13 million as lower pre-tax earnings were more than offset by prior year benefits related to option exercises investing of other equity awards. After unique items, we continue to expect an effective tax rate of approximately 24.5% for future quarters.

Closing out the P&L. As Jim highlighted in his opening remarks, CSX operating income declined 3% year-over-year, while the first quarter operating ratio of 58.7%, represented an 80 basis point improvement. Turning to the cash side of the equation on slide 12. In the first quarter of 2020, capital investment was up slightly year-over-year. We continue to invest in our core track, bridge and signal infrastructure and we continue to prioritize investments that provide safe and reliable train operations. While we are evaluating our capital in total, even during this downturn in volumes, our commitment to invest in the safety of our core infrastructure will not change. In the first quarter, free cash flow before dividends was $812 million, down slightly, reflecting higher capital expenditures and lower proceeds from property dispositions.

Free cash flow has continued to be a key focus for this team. And we saw free cash flow conversion exceed 100%. The company continues to demonstrate a commitment to shareholder distributions, including dividend payments. Importantly, I mentioned previously, our cash and short-term investment balance entering second quarter is nearly $2.5 billion. This position gives us confidence that combined with efficiency and initiatives we can not only weather the storm in front of us, but take advantage of opportunities that may present themselves to create long-term value for shareholders

With that, let me turn it back to Jim for his closing remarks.

James M. Foote — President And Chief Executive Officer

Great. Thank you, Kevin. Concluding on slide 14. Due to the uncertain economic environment, and this should be of no surprise to anyone, we are withdrawing our guidance for the year. The potential range of outcomes for both production and demand as well as the potential shape of the recovery are too wide to predict at this time. We are constantly assessing the economic situation and will respond like we always do, by taking appropriate steps to control costs. But with an ever vigilant eye toward maintaining current, but most importantly, long-term service for our customers. We have worked too hard to get this right to go backwards.

We are also evaluating our capital expenditure outlook for the year. Our first priority is and always will be the reliability and integrity of our railroad. We will not reduce or defer any spend that impacts safety. We will install about the same amount of rail and more ballast this year than last. And Kevin and his team are looking for materials buying opportunities. We are, however, identifying potential areas of efficiency within our capital plan and the opportunities to defer some nonessential spend. The plan will be refined as the year progresses, but currently, expect capital expenditures at the low end of our initial $1.6 billion to $1.7 billion range. Importantly, CSX entered into this period with a dramatically different cash flow profile than at any point in the company’s history.

Over the course of our transformation, we have more than doubled CSX’s free cash flow conversion and ended the quarter with almost $2.5 billion of cash and short-term investments and an untapped revolver. We will take the necessary steps to ensure sufficient liquidity. These are unprecedented times. I’ve been through a lot in my career from Black Monday to the Great Recession and a lot of other unsettling events, but nothing like this. But I can say with certainty, long companies adapt. They make changes, and they get even stronger. I hope this current situation passes soon, and we settle into the new normal. But for sure, the best is yet to come for CSX. Bill?

Bill Slater — Head of Investor Relations

Thank you, Jim. In the interest of time, I would ask everyone to please limit themselves to one question. Also, we ask everyone to please bear with us as we work through the logistical challenges presented by joining today’s call from different locations.

With that, we will now take questions.

Questions and Answers:

 

Operator

[Operator Instructions] Our first question comes from the line of Amit Mehrotra from Deutsche Bank. Please go ahead.

Amit Mehrotra — Deutsche Bank — Analyst

Thanks operator. Thanks everybody for taking my questions and congrats on the cost performance in the quarter. It’s pretty impressive. Kevin, I think it would just be really helpful to get some help on how we can think about decremental margins in the second quarter. We’re obviously facing 20% plus volume declines. The 25%, 26% decrementals you guys achieved in the first quarter was great, but obviously facing maybe a more benign volume environment than what we’re going to get in the second quarter. So just any way to think about that? And since I only get one question, if you can just also comment on how the pricing environment has evolved, if at all, in the context of the volume declines? Thanks a lot.

Kevin S. Boone — Executive Vice President And Chief Financial Officer

Yes, Amit, I think that qualifies as two. I’m going to give you a path into the first one going today. Look, I knew the decremental margin question would come up on this call and we talked about a lot. And I know you want to plug-in your models a certain decremental margin given your assumption here. I can give you a framework, but I don’t think we’re going to lay out necessarily what the decremental margin could be because there’s a lot of different scenarios that could occur.

What we’re really focused on in this environment is taking out structural costs and really, on the other side of this really emerging. And quite frankly, a better position than maybe we would have had does not happen. So, but just going through the P&L here, obviously, depreciation is a cost that’s more something that in the near-term and medium-term is more difficult to go after. We’ve done a great job on becoming more capital-efficient. That will work its way through depreciation over time, but that’s something in the near term, that’s obviously part of the move. When we look at our labor cost, as I described in my script, we obviously, with the great work that Jamie and his team have done, eliminating train starts and other things, we’re seeing headcount and reduced labor costs, come out pretty significantly with the lower volume environment that we’re seeing.

And as you know as your experience will tell you, it includes a lot of different items. When I look across MS&O and how we look at it internally, traditionally, we’ve said about 30% is highly variable. And then you have the rest of it, 25%, we generally said it’s less structurally less variable. But those are the things that we have to look at in this environment to really go after. And so that’s where we’re going to challenge ourselves. Clearly, the rent expense from a car hire perspective shouldn’t move the volume, but there are some offsetting relationships where we want to earn as much on our fleet in terms of rents. And then the TTX relationship obviously creates some somewhat of a less volume-related upside that we will traditionally see.

So, there’s a lot of pieces. We’re not going to draw the line in the sand on what the decremental margins are. I can tell you what we have done is we’re taking a review of everything. Our challenge here is to variabilize every cost we can. Reevaluate it and the working conditions today, working from home and all of those, I think are introducing opportunities for more efficiency for us. So, we’re driving those where we act as the volume plays out here over the next quarter or two. And I think you’ll see additional opportunities that will drive.

Mark K. Wallace — Executive Vice President Of Sales And Marketing

So, Amit, its Mark. Maybe I’ll take the second part of that first question. I think that was cheap, but going to be a recurring theme throughout the afternoon here. In the pricing story continues to be very strong. I think if you look at the RPU results, the RPU is a mix story. Not — and I’ll repeat again, it’s not a pricing story. Pricing continues to be very good. Same-store sales sequentially and year-over-year are very, very good and our negotiated contracts exceeded our same-store sales pricing.

So, the team is doing an exceptional job in these circumstances to extract good value for the transportation product that we are delivering to our customers, which, as Jim and both and Kevin said, continues to be outstanding. So, I’m very, very pleased. The team has done a phenomenal job and has delivered great results on the pricing side.

Operator

Your next question comes from the line of Brandon Oglenski from Barclays. Please go ahead.

Brandon Oglenski — Barclays — Analyst

Hey, good afternoon everyone and thanks for taking my question. Congrats on the quarter. Although the question I’m going to focus on here is the rate of decline that we’re seeing in the second quarter. And Mark, maybe if you can speak to that. I think we show your volume down about 20% so far in April. Do you have any indications from customers when they plan to reopen sites or go back to higher levels of shipping? Or have we not even felt potentially the bottom of it yet?

Mark K. Wallace — Executive Vice President Of Sales And Marketing

Brandon, I would say, my crystal ball is probably as good as yours in this uncertain environment, things are so fluid. What we’re doing is we’re continuing to stay very, very close to our customers. I know the team, while working remotely is staying very close to customers, reaching out to them on a weekly basis, trying to get a feel for their business, the impact to their business. How that affects the supply chain, what we can do to react. What I would say is, these times are very uncertain, and customers are seeing the same sort of things that we are.

And so we are — we’re doing, what we can control, and that’s continuing to provide our customers with the best possible service and watching the volumes very closely. Jamie and I talk every day and sometimes way more than once, and our teams do as well. And we’re doing an exceptional job of staying on top of things. But I can tell you, what our customers reopen and things come back to normal, so to speak, we’re going to be there to provide exceptional service for them and be there for them when they get back.

So there’s a lot of uncertainty, as I said. Clearly, the automotive guys are down. We hear the public reports that those facilities, those plants will be opened sometime in early May, around May 4. I think GM said today, they may push some of those plants back a week or two, but we’re seeing very, very close to them. We have weekly calls with all our customers and especially the automotive guys. And we’re just watching it and seeing what happens.

Brandon Oglenski — Barclays — Analyst

Thank you.

Operator

Your next question comes from the line of Allison Landry from Credit Suisse. Please go ahead.

Allison Landry — Credit Suisse — Analyst

Good afternoon. Thanks. So in the past, you’ve said that you still had many cost levers to pull as part of ongoing PSR implementation. So does the current downturn in volumes provided opportunity to speed up some of those remaining initiatives? So if you could speak to an acceleration and cost takeouts and also any other changes in the network, that you might be able to pull forward that would potentially put you guys in an even better position to benefit from a recovery sooner than you might have otherwise. Thank you.

James M. Foote — President And Chief Executive Officer

Thanks, Alison. The — I’ve talked many times about the difficulties associated with the decline on a gradual basis over the last 12 months to 18 months associated with a stagnant industrial economy and that we can respond quicker when there are downturns. And the job that the team did in responding over the last four weeks, in essence, not counting the international intermodal that started a little bit earlier. But over the last short period of time, that responding to this quick downturn was nothing short of amazing. Jamie, why don’t you talk about all of the steps that you guys took?

Jamie Boychuk — Executive Vice President Of Operations

Sure. Absolutely. Look, we obviously, over the past few weeks here, we’ve really started to adjust our network to what we’re seeing as the current environment and the way that demand sits. So we’ve made a lot of changes out there, where we’ve reduced over the last couple of weeks, a number of our assets. But really, we’ve reduced our total road starts by 23% year-over-year against the 25% decline in volume. We stored over 400 locomotives since the end of March, driving our active locomotive count under 2,000. And to put that in perspective, three years ago when we started scheduled railroading at CSX, we had over 4,000 locomotives.

We also held our merchandise train length consistent, yet we’ve been able to eliminate over 500 merchandise trains from our daily plant, which is more than a 20% — sorry, 50 merchandise trains from our daily plan, which is more than 20% reduction. While we’ve been doing all that, we’ve been able to reduce our train delays by over 66%. So I think it’s really important to note that these changes are not just volume related. That we started really right off the start, ready for growth, working with Mark and his team, while they were driving with customers.

Now we’re really starting to pivot and use the current environment to go after structural opportunities in our operation. We will continue to adjust our network as demand dictates going forward. But we are also making changes where assets will not need to come back in the future. This is really an exercise for us to continue to work close with our marketing team, adjust our volumes in network each and every day. But at the same time, we are ready when volume returns to go after that volume and not leave a carload behind.

Allison Landry — Credit Suisse — Analyst

Thank you.

Operator

Your next question comes from the line of Tom Wadewitz from UBS. Please go ahead.

Tom Wadewitz — UBS — Analyst

Yes, good afternoon. Remarkable job on the cost side, very impressive how quickly you’ve responded. I wanted to get your thoughts, Mark or Jim, just in terms of how does the — I guess — I mean, when the markets moved so much, maybe it’s irrelevant. But how do you interact with customers in terms of you got to cut costs?And is the kind of share gain versus truck story, something you can kind of put on hold and say, we’ll revisit it in another year? Or is it something that you kind of — you gauge the way you manage the way you cut costs, so that you still have that service and kind of dialogue from before? I mean, it seems like it’s kind of an incremental question in a market that’s very macro driven, but how do you think about that relative to the obvious success in cutting a lot of costs?

Jamie Boychuk — Executive Vice President Of Operations

Tom, as I said in my opening remarks, we have worked like dogs to get the service levels of this railroad up to where they belong and to win back credibility from our customers. And so we are — first of all, and Mark can follow-up on this. But Mark and Jamie, as Jamie said, are in constant communication with each other and making sure that our customers are aware of what service changes we need to make and what the impacts to our customers may be and it also — in many circumstances, the reason — again, the reason that we’re reducing train starts is because their volumes are down.

And all we need to do is have an honest dialogue with our customers about the fact that we don’t think we can serve them five days a week, how about 3, and they go, sure. Let me make the necessary adjustments where it is appropriate. But Mark and his team are, as he said, constantly communicating with the customers about that. Mark, why don’t you follow-up.

Mark K. Wallace — Executive Vice President Of Sales And Marketing

Yes. Sure. Jim is exactly right. And we’re talking with our customers. Certainly, where they’re seeing volume declines because their own businesses and their businesses are softer, and we have an opportunity to maybe take a day out of the service or whatever. We’re having those conversations and we’re staying close to Jamie and making those changes. Service is safe around here and our commitment to our customers is important. And we take that responsibility very, very importantly.

And as Jim said, we’ve worked really, really hard over the last three years to put in the reliability and the consistency of service that customers expect from us. We’re doing that. We continue to do that, and we’re not going to — just because volumes are declining, we’re not going to walk away from that strategy. And so we’re continuing to work with everybody. And listen, I think the weekly carloads are showing that. I mean, we — with our better service, as I’ve talked many times, we have repositioned our marketing teams to really get away from just being pricing people to really understanding and doing real marketing work and looking for opportunities for us to gain share from other modes of transportation.

And they’re going to consider that. I’m not sitting in the home for a year just because the volumes are down. They’re going to continue to work. We’re winning in the marketplace. We’re uncovering opportunities with our better service products to win share from other modes of transportation. And I think you’re seeing it in the carload. So, we’re having tremendous success there, and that work is going to continue.

Tom Wadewitz — UBS — Analyst

Okay, great. Thank you.

Operator

Your next question comes from the line of Brian Ossenbeck from JPMorgan. Please go ahead.

Brian Ossenbeck — JPMorgan — Analyst

Hey good afternoon. Thanks for taking the question. You had a few comments on fuel efficiency. I wanted to circle back to that. I think going to the 2018 Investor Day, the thought was about 0.95. It’s probably the only target you didn’t hit early from that outlook. So, I just wanted to hear, can you still get to that number? It sounds like a lot of the efficiency gains you’re making now aren’t necessarily volume dependent. So, just wanted to see what were the main factors to drive to that and if that goal was still potentially on the table?

James M. Foote — President And Chief Executive Officer

Jamie, you want to take that?

Jamie Boychuk — Executive Vice President Of Operations

Yes, absolutely. Look, fuel is something that we talk about consistently here at CSX. And everyone on our team, on the operating team, knows clearly where our targets and our goals are with respect to that. We are using technology constantly to make sure that we hit those targets as we continue to break through new records each and every quarter as we move forward. We feel confident that we will continue to show the improvement that we have in the past, and we’ll continue to move that forward.

Definitely, as our — as we fill out our trains and we make our trains bigger and longer, that helps with the efficiency where two locomotives are pulling more freight than they were before as we consolidate trains and as we continue to move forward into volume growth at some point in time when the market conditions change. But yes, it’s an important key factor. I’ve got an unbelievable operating team who is working on this. We have created our own small department of a few individuals, who are solely concentrated on fuel efficiency, and those people will continue to do what they’re doing and driving the metrics to where we’re seeing them.

James M. Foote — President And Chief Executive Officer

I guess, we’ll take an A minus on one of our — on one of the categories.

Brian Ossenbeck — JPMorgan — Analyst

All right. Thanks, Jamie.

Operator

Our next question comes from the line of Ken Hoexter from Bank of America. Please go ahead.

Ken Hoexter — Bank of America — Analyst

Great. Good afternoon. I hope all is well and safe. And Jim, you’ve always provided good insight into kind of calling the volume outlook. Maybe just talk a bit about — more about keeping the cost around, if you anticipate a quick bounce back given the speed of the decline compared to so suffering with some higher costs in the near term? And I guess, I’m more specifically referring to employees and how you think about furloughing or cutting additional employees with the ability to get them back up and running quickly.

James M. Foote — President And Chief Executive Officer

Well, Ken, that has been the number one area of concentration for me for the last month is trying to deal with the — not only the making sure that we have the employees ready, willing and able when as this business turns around. But to make sure, because of the tragic circumstances, both with the disease and the economic fallout at the same time to make sure that we were very humanitarian in the way we’ve approached things. We have been working diligently with the labor unions from Day one, and have come up with some unique arrangements to address those concerns, recognizing the fact that the future is clearly unknown in terms of how long this is going to last.

And so we’ve done a lot of interesting and unique things in conjunction with labor, especially in the early days to keep the employees working and then to be able to pivot to adjust in a manner when volumes really began to decline. But to make sure we have access to those employees when things turn back. So we have been thinking way outside the box, try and come up with ideas wherever we can. And right now, I feel we’re in as good a position as one could be in that circumstance. I wish, I had a crystal ball in terms of the future volumes. But right now, we just don’t have that.

Ken Hoexter — Bank of America — Analyst

So I guess, just to clarify.

Jamie Boychuk — Executive Vice President Of Operations

Just on some of the points that Jim kind of put out there was, we have, with our union groups, we have set up some agreements that will allow our employees to go on what we call a retention board. It’s their choice. I’m sorry, it’s a reserve board. It’s their choice to get on that board or not. Most of our employees, a large number of them have decided to go on to that Board instead of taking furlough on the T&E side. And the benefits for us, and of course, these are tough decisions that we’re making as we continue to work on this downturn and control our costs.

But the benefits is it’s a less carrying cost for us, but it allows the employees to have medical benefits and other benefits along the way, but gives us, in most cases, a 48-hour recall for when the volume starts to come back, we don’t have to wait the normal period, which is around a 15-day recall cycle. We’re able to jump on volumes, as Mark and his team work on and as the economic conditions change.

Ken Hoexter — Bank of America — Analyst

Thanks.

Operator

Your next question comes from the line of Chris Wetherbee from Citi. Please go ahead.

Chris Wetherbee — Citi — Analyst

Thanks for letting me guys. Maybe a question on intermodal and I guess maybe two pieces to it. I guess, first, when you think about sort of the customer mix and what you guys are moving both on the international and the domestic side. Is there any sense that you can give us to sort of what is maybe for consumer and sort of essential type businesses that could be operating kind of what the floor might be like in that?

And then secondarily, in times of disruption like this, do you tend to see modal shift occur? Obviously, truck spot rates have gone down quite a bit here, but that typically isn’t the sort of measure that you guys tell us to look to in terms of how to think about share between truck and rail as more contractual. So just want to get a sense of maybe how that kind of plays out when you’re in a very disrupted state like we’re in right now.

Jamie Boychuk — Executive Vice President Of Operations

Mark?

Mark K. Wallace — Executive Vice President Of Sales And Marketing

Sure. Thanks. So look, when we started off the quarter, intermodal was doing quite well. We had the traditional Chinese New Year on the international side, where volumes were reduced significantly. And then because of COVID-19, the outbreak in China, with the extended shutdowns, we sort of saw a pause on the international front for quite some time. Meanwhile, the domestic side of the business was doing actually pretty well. I think as people saw what was happening, there was a lot of inventory being needed out of the warehouses and positions to stores in anticipation of the increased demand. And so we saw that dynamic and then China opened up a little bit later in the quarter. We saw some international volumes come in. And meanwhile, the domestic side of the business was — is slowing down considerably.

So right now, as we look out, you can — a lot of reports out there about the demand equation I go. And clearly, the — with a lot of the shutdowns and the retail businesses are closed. There’s not a lot of demand for this. So there are a lot of bright sailings on the international front, and we expect that our domestic Intermodal business will slow down considerably and is slowing down considerably now and for the foreseeable future. So those are sort of the dynamic shifts that have been going on.

Service is tremendous. Our on-time performance is in the high 90s, 98%, 99%. We’re seeing — so as it pertains to truck. The trucking environment was tight and then it’s loosened up quite significantly and is, it’s pretty fluid now. So that’s — we have to continue doing what we’re doing, providing great service to our customers. Clearly, competition from the trucks, there’s a lot of trucks out there. And we’re going to compete hard and try to win some business, but that’s kind of the environment right now.

Chris Wetherbee — Citi — Analyst

Okay. That’s very helpful. Appreciate it. Thank you.

Operator

Your next question comes from the line of Scott Group from Wolfe Research. Please go ahead.

Scott Group — Wolfe Research — Analyst

Hey thanks. Afternoon guys.

James M. Foote — President And Chief Executive Officer

Hey Scott.

Scott Group — Wolfe Research — Analyst

So, Kevin, last quarter, you talked about some specific headwinds. I think it was $300 million or so in coal revenue, $90 million lower gains, $50 million in the other railway revenue. I don’t know if those are so impacted by what’s going on. So maybe just a comment if you think any of those have materially changed. And then, Mark, for you, just quickly, have we seen the full impact of the benchmarks in coal RPU or is there one more leg down to come here?

Kevin S. Boone — Executive Vice President And Chief Financial Officer

Yes, I’ll cover a few of those headwinds. I think we — on the previous call, I mentioned real estate sales last year was about $160 million. We’ve guided for this full year of $60 million. Based on my comments, we’ll probably see something a little bit south of that $60 million. The market is fluid right now. We obviously feel sequentially the number will be in line with the first quarter. Fourth quarter is probably a little bit more uncertain, depending on the market and conditions that exist today. We’re certainly not going to fire sale anything. And we have plenty of cash, and we’re going to maximize value, of course.

And then on the depreciation, as I described, the $50 million to $60 million headwind, primarily related to the group life study there is obviously non-cash, but it’s impacting the income statement on that side. From a coal perspective, I’ll let Mark talk a little bit more about that. But I don’t think, in aggregate, that headwind has changed in the market. It’s probably somewhat similar, but I’ll let Mark touch on that.

Mark K. Wallace — Executive Vice President Of Sales And Marketing

Yes. No, thanks, Kevin. Scott, yes, I would say, I don’t know. I would say the benchmarks are sort of all over the place. I think from what we told you in Q4 in January, I think from a benchmark perspective, we’re still sort of thinking the same thing. Clearly, a little bit of weakness on EPI to prices, a little bit less of a factor now because a lot of coal is going in Europe. But most of our coal — a lot of our coals, especially on the thermal side, in going to India, India is go down for a month. One that reopens anybody’s guess. So, no coal is on India right now. So, those dynamics are happening.

The net benchmark came up a little bit. Those are repriced quarterly. So, — but clearly, as Jim said in his opening, coal was — had some headwinds. We didn’t foresee any of these coal dynamics when we were talking to you in January. The markets have changed dramatically. So, there’s clearly some headwinds out there. And benchmarks are one, but demand is clearly the driving force here.

Scott Group — Wolfe Research — Analyst

Okay. Thank you, guys.

Operator

Your next question comes from the line of David Ross from Stifel. Please go ahead.

David Ross — Stifel — Analyst

Good afternoon gentlemen. Maybe this is a question for Jamie. Can you talk about mix, specifically, are there any commodity types that you haul that either help or hurt overall network productivity that might be harder to handle or slow the network for some reason, for example, if auto is not around, is that a good thing or is there any other commodity type that might limit network efficiency?

Mark K. Wallace — Executive Vice President Of Sales And Marketing

Well, a good thing.

Jamie Boychuk — Executive Vice President Of Operations

Yeah. Look at, on the operating end of things, of course, we’ve really only got three different types of commodity, our type of trains, I guess, we would say. So you’ve got our bulk service, which is easier, lower cost, in most circumstances and cases. And then we have our merchandise, which is usually handled multiple times throughout a network by the time it gets from online or from customer to customer.

With respect to the auto side of the business, I would say that, it is — it’s heavily — on our network, it’s very customer based with respect to a lot of work done at the loading facilities and unloading facilities. So there are a number of yards and locals. And we do have some dedicated auto trains that run in certain parts of the network. So when it comes to cutting off auto, even though it’s a revenue that we don’t want to lose, and it’s a good revenue for us. There’s — you can pull out a lot of cost with respect to auto when the auto network shuts down the way it did.

Scott Group — Wolfe Research — Analyst

Thank you.

Operator

Your next question comes from the line of Jordan Alliger from Goldman Sachs. Please go ahead.

Jordan Alliger — Goldman Sachs — Analyst

Yeah. Just a quick question. Obviously, most of the volume environment is pretty tough right now. But is some buffer come from agriculture, agricultural products? Is that something that might actually not look that bad in the grand scheme of things? Thanks.

Mark K. Wallace — Executive Vice President Of Sales And Marketing

Well, it certainly — commodities got a little different cycle to it. We’re looking at, as an example, a reasonably good movement of fertilizer now because that’s the time of the year to do that. And I think everybody is still planning a crop this year. And then in all the various buckets, a lot of them, again, as you said, agricultural has its own cycle based upon its commodity it’s not tied to auto production as an example.

Jordan Alliger — Goldman Sachs — Analyst

So, there is as you said, a different cycle than the rest of the industrial. So maybe there could be some hope on that volume front?

Mark K. Wallace — Executive Vice President Of Sales And Marketing

Yeah. Yes. There’s certainly — yes, certainly, each element has its own drivers, so to speak, and auto, as an example, is one thing that impacts a lot of different groups within the industrial and merchandise segment. And — but yes, there are certain elements. I mean, there’s going to still be some coal is going to move. Like I said, fertilizer is going to move. Grain is going to get harvested. We’ve always relied on grains in one shape or another to keep the railroad going, whether it’s corn, wheat or beer.

Jordan Alliger — Goldman Sachs — Analyst

Great. Thank you.

Operator

Your next question comes from the line of Justin Long from Stephens. Please go ahead.

Justin Long — Stephens — Analyst

Thanks and good afternoon. So one of the noticeable trends year-to-date has been the outperformance of your volumes versus your Eastern rail competitor. So I was wondering, if you could comment on how much of that outperformance, in your opinion, is coming as a function of market share gains from that rail competitor, market share gains from truck and mix. And maybe as you answer that question you could also address the lower fuel price environment and how you’re thinking about the modal share impact from that going forward as well? Thanks.

Jamie Boychuk — Executive Vice President Of Operations

Mark?

Mark K. Wallace — Executive Vice President Of Sales And Marketing

Sure. Sorry, I was doing something else. I apologize. We are seeing share — a good share gains across the portfolio. Was our strategy when we started this thing was to put in place the best service product that we could. We’re doing that. We continue to do that. Next, we are focused on — the sales and marketing organization is really focused on three things. Number one, because of the superior service that we have, working with our existing customers to expand the amount of rail that they use: Number two, work with customers who used to have — some freight with CSX. But for some reason, over the last couple of years, that the — for various reasons might have went away.

We’re working hard with those customers to bring that freight back home, I would say. And the third strategy is working with shippers who may have traditionally never used rail in the past, but have always looked at truck is easier to do business with. And never — we really wanted to consider rail as an option. Because of the work that we’re doing to make it easier to do business with, because of our cost profile we’re able to go into some of those markets now that our marketing team is identifying and looking at and being able to win share there. For instance, we’ve been very successful in one segment in the business of aggregates.

Aggregates continues to be a very strong commodity first these days. There’s a lot of road construction projects that are going on. Traditionally, a lot of that coming out of like from Georgia into middle of Florida. It’s less than 300 miles, used to move by truck. Because we have the capacity, because we have the service, we’re able to play in those markets and make a very good return by doing so. And the contribution on that is very good. So we’re very — so we’re looking at all these different buckets of opportunities. The teams are being very aggressive. And I think, as you said in your question, you can see it in the results when you see on a weekly basis.

James M. Foote — President And Chief Executive Officer

Justin, on your comment about the dynamics between rail versus truck and the impact that lower fuel prices might have. We — that’s one of the reasons why we’re continuing to work so hard to make sure we reduce our fuel efficiency is so that we can be more competitive with the highway. But there have been a number of recent independent surveys that are out there right now, where they ask customers, you’re still — are you planning — what do you think about rail transportation? Is it reliable? Yes, it’s fantastic? Yes, are you likely to shift probably a little bit more than it was in the past? Is there still value to shipping rail versus truck? Well, maybe it’s not 15% when oil is negative 35%, but they still say it’s 10%. 10% cheaper with the same truck-like service is extremely compelling in the marketplace.

Justin Long — Stephens — Analyst

Great. That’s helpful. Appreciate the response.

Operator

Your next question comes from the line of David Vernon from Bernstein. Please go ahead.

David Vernon — Bernstein — Analyst

Hey good afternoon. Kevin, a question for you on the balance sheet side. You’ve got about $2 billion worth of cash, obviously, ample liquidity; cash flow position in the business is good. Are you guys going to get back to more aggressive capital returns through buyback? Or are you thinking about changing in the way you’re going to be returning some of that capital to investors, emphasizing more of the dividend? Any changing thoughts on that capital return profile going forward?

Kevin S. Boone — Executive Vice President And Chief Financial Officer

Yes. Clearly, it’s a dynamic market right now. We’re very happy to have $2.5 billion of cash on the balance sheet and growing every day. We’re still generating positive free cash flow. So, that’s — but clearly, when we look over the medium term and even long-term, that’s not a cash balance that we are going to meet on the balance sheet. And we still feel distributing it to our shareholders is something that we’ll prioritize going forward. When the buybacks will continue? We’ll continue to discuss that over the next few months. But I would expect that at some point for that to be still a core component of our cash return to shareholders.

I mentioned on the opening remarks that we’re committed to our dividend. It’s something that we reevaluate every year. We just recently, this year, increased that. And so we’ll see what we do next year. But again, we’re generating significant free cash flow even in these market conditions and we can cover that dividend. And we continue to be committed to shareholder returns.

David Vernon — Bernstein — Analyst

All right. Thank you. Maybe if I can sneak one quick follow-up in. Jim is there anything on the policy side you’re looking at coming out of D.C. that would be beneficial or game-changing beyond, obviously, the economy just restarting. Anything in infrastructure spending or stuff like that that we should be keeping an eye on that would have an outsized impact on CSX?

James M. Foote — President And Chief Executive Officer

Nothing that is game-changing. We’re clearly interested in any kind of financial stimulus that would involve infrastructure because that would be a benefit to us. But no, so far, to-date, the government in terms of providing flexibility to the rail industry, to be able to operate and maintain all of the safety requirements, especially with the ad hoc nature of the way some of this was implemented in the states. We have not really been implemented — impacted and the government has been very cooperative with us.

David Vernon — Bernstein — Analyst

All right. Thanks a lot guys.

Operator

Your next question comes from the line of Walter Spracklin from RBC Capital Markets. Please go ahead.

Walter Spracklin — RBC Capital Markets — Analyst

Yes, thanks so much. Good afternoon everyone. I guess if we were to look out beyond COVID-19 and understanding that there’s the world in the future is not going to be — we’re not going back to normal and there could be some opportunities that emerge in that new normal, Jim. When you look at how the world might develop post-COVID-19, how it’s structurally different. Is there anything that a railroad or CSX, in particular, can do to capitalize on a new normal that is just different from the way things operated before?

And if I could lead the witness for a second, the retail focus on e-commerce and the higher cost that are contained in that strategy of e-commerce is a new strategy. Can you benefit in that e-commerce either because the retailers are also looking to offset that with a lower cost rail option? Or can you somehow play a role in the e-commerce chain in a way that you didn’t before?

James M. Foote — President And Chief Executive Officer

Well, yeah, there is two benefits. Well, let’s not call it benefits. I shouldn’t move that we’re there are two opportunities for us that may arise as things evolve. First is, I think, and this is just my own personal thoughts. I think that there will be more manufacturing that takes place in this country and any kind of business activity like that is good for the railroad. Secondly, we, now, we now can compete with the truck in the market as they become more and more large quantity shippers that fit well into the rail dynamics, because of our service. So with our service product that we had before and because of the spirit network the way product moved, it was difficult for the railroads to compete in the e-commerce arena. I think that as we go forward, that will be a big opportunity for us.

Walter Spracklin — RBC Capital Markets — Analyst

Okay. Appreciate the time.

Operator

Your next question comes from the line of Jason Seidl from Cowen. Your line is open. Jason, your line is open. Please un-mute yourself.

Jason Seidl — Cowen — Analyst

Thank you, operator. Hey, Jim and team, I hope you guys are doing well. It seems like we’re going to be coming out of this pandemic on a state-by-state basis. So it’s going to be a little bit choppy and disparate. What kind of challenges is that going to present to CSX in the network?

James M. Foote — President And Chief Executive Officer

Probably the same kind of challenges that we experienced in the past, when I talked about a slow decline is harder to manage than a complete shut off. It was easier for us to adjust, as we described, when the auto industry just completely shut down in a week. My guess is the auto industry won’t completely start-up in a week. And so we will be challenged as the traditional logistics chain is not the same. And so we’ll have to evolve. We’ll have to work with our customers. And it will present more of a challenge for us. I don’t see the fact that one state might come back online in certain areas, two weeks before somebody else does, sectors starting up before Pennsylvania is not that big of a deal. It’s the industry that will start-up across the country based on the comfort level of the population as the states come back.

Jason Seidl — Cowen — Analyst

Yeah. That makes sense. And is this where sort of that flexibility with your headcount is going to really come into play and help you out?

James M. Foote — President And Chief Executive Officer

Sure, yeah, that’s why we — again, we’re trying to anticipate, you maybe heard a lot of people talking about planning, modeling, thinking, what do we do, new norms. We have spent — and continue to spend a lot of time brainstorming about what could happen and how are we going to be in a position to respond?

Jason Seidl — Cowen — Analyst

Sounds good. listen, every one be safe out there.

James M. Foote — President And Chief Executive Officer

Thank you.

Operator

The next question comes from the line of Jon Chappell from Evercore ISI. Please go ahead.

Jon Chappell — Evercore ISI — Analyst

Thank you. Jim, in your closing comments, you mentioned some of the prior periods of disruption that you’ve been through. And obviously, each one is different. But you’re former employer in you, Jamie, Mark arguably had the best performance, both operationally and financially during probably the closest thing to what we’re dealing with now in ’08, ’09. And what are some of the similarities that you see with this environment in Fact ’08 and ’09 and some lessons that you can bring from that period that helped you at it proactively to get the system right-sized yet still without disrupting the service?

James M. Foote — President And Chief Executive Officer

Well, I think ’08, ’09, again, we saw not this sudden shutdown, but we saw clearly a dramatic shutdown. And as a result, we looked back to those days to see, yes, because I wasn’t at CSX and pretty much — none of us were here. To see what the traffic declines were, what the traffic pattern declines were. And it was helpful for us to try and to understand what it’s like when 20% of your business goes away in two weeks. So lessons learned from all of those things. I hate to age myself. But yes, I’ve been through just about every modern-day financial calamity plus, like I said, others in my career. And — but this one is clearly the most challenging.

Jon Chappell — Evercore ISI — Analyst

Are you implementing similar operational things that you did in the north of the border 12 years ago? Or is it a completely different response given the network and the geographic exposure?

James M. Foote — President And Chief Executive Officer

No, it’s — again, there’s no magic to the geography. There’s magic to people. And the mindset of the people here in terms of making decisions, being quick, being nimble and getting things done, all while looking forward and not getting a — television is the same. We have we have a phenomenal team that recognizes what needs to get done, and we work together and we execute. Just the way we did it before. I mean, it was just good people there.

Jon Chappell — Evercore ISI — Analyst

Thank you.

Operator

Your next question comes from the line of Cherilyn Radbourne from TD Securities. Please go ahead.

Cherilyn Radbourne — TD Securities — Analyst

Thanks very much and good afternoon. So clearly, we’re in uncharted territory here, and you’ve talked a lot about how you’re staying close to your customers. But I wonder if you could just talk a bit about how you’re collaborating with your interchange partners to prepare for various downturn and recovery scenarios?

James M. Foote — President And Chief Executive Officer

Well, it’s a network business. What happens to one of us happens to all of us. It wasn’t that just the auto plant shutdown on CSX. They shut down across the country. We work together on a constant basis, managing the fleet as it moves across the network, open lines of communication, good coordination, making sure that we don’t get a lot of equipment stuck in one terminal that could begin to slow down the network. And I think over the last couple of years, you’ve heard many of us say, most of the operating people now at the various railroads, all think alike. We’re all kind of working off the same page in terms of moving assets and running the network to the maximum level of efficiency, and that’s been extremely helpful. The coordination and understanding has been extremely helpful.

Cherilyn Radbourne — TD Securities — Analyst

Thank you. That’s my one.

Operator

Your last question comes from the line of Ravi Shanker from Morgan Stanley. Please go ahead.

Ravi Shanker — Morgan Stanley — Analyst

Thanks. Jim or Kevin, if I can just follow-up on the last response. Obviously, completely understandable that you pull your guidance given the variety of kind of the spread of uncertainty out there. But I’m sure you guys have planned for multiple scenarios that can play out over the next two or three quarters. So, can you share kind of some of the — like the Bulbar base case scenario, kind of what volumes look like in 2Q, 3Q, 4Q, kind of as part of your planning samples?

James M. Foote — President And Chief Executive Officer

Well, yes, we’ve certainly looked at all of the alphabet, the V, the U, the Ls and what I use the W as possible recovery scenarios. And obviously, the volumes in each one of those numbers is significantly different. So, as a result, because there is such a huge difference between that. That’s why at this point in time, maybe give me another 30 days, we’ll have a better vision as to what the real start-up plan for the auto is, what’s going on with steel, what’s going on with X, Y, and Z. Other than that, it’s just a hypothetical exercise, and that’s why we didn’t want to try to guess at this point in time. And so I apologize, but we’re just not going to give you some kind of numbers like that.

Ravi Shanker — Morgan Stanley — Analyst

Okay. Thanks.

James M. Foote — President And Chief Executive Officer

Yes Ravi.

Operator

[Operator Closing Remarks]