Transcripts
CSX Corporation (CSX) Bank of America Transportation, Airlines and Industrials Conference – Transcript
CSX Corporation (NASDAQ:CSX) Bank of America Transportation, Airlines and Industrials Conference Call May 18, 2023 8:00 AM ET
Company Participants
Kevin Boone – EVP, Sales & Marketing
Conference Call Participants
Ken Hoexter – Bank of America
Ken Hoexter
We are here in Boston for our 30th Annual Transport Conference, the Rail Air Transport, Airlines And Industrial Conference. To open our conference we welcome CSX and Kevin Boone, EVP of Sales and Marketing, a position he has held at CSX since June of 2021 after serving as Acting CFO. He started at CSX back in 2017.
Also, here in the audience is Matt Korn from Investor Relations. We welcome Kevin to our conference for the third time in the past four years. Welcome CSX for its 15th consecutive year and 20th time in the 22 times we hosted the conference. So thank you to CSX for your steadfast commitment to the conference.
CSX is actually one of our top rail-focused dots given its sustained operating performance, built-in capacity for growth and solid operational execution. We’ve got a lot to cover in the 35 minutes. So I’m going to take the seat, join Kevin and just jump right in with some questions.
So, Kevin, let me turn it over to you. I guess, I understand you’ve got a few thoughts, updates on service levels, what your key messages as we’re now more than halfway through the second quarter?
Kevin Boone
Yeah, well, first of all, thanks for having me. I think two of those are virtual right? Two of the three. Well, this is the first time back in Boston in a long time. Selfish last night I was here. So I wasn’t awake by the end of that again. But, no, there’s a lot to talk about. We have a lot of excitement. Lot of energy around CSX. We’ve obviously had a leadership change and that’s been exciting for our – internally for our employees and so another thanks. Lot’s happening today certainly a challenging backdrop in terms of the market.
Lot of debate around the recession and I agree with some of your comments earlier. I believe we are already in the recession from a lot of the things that we’ve seen from a demand perspective.
On the flip side we’ve made tremendous progress on the service side. We are getting really, really positive feedback from our customers and that’s translating into strong merchandize growth as you’ve seen.
Intermodal has been weak. That’s consumer-facing and we’re seeing that weakness continue. But we’ve seen stability, I would say in the last few weeks, so that’s encouraging and in terms of our numbers and we are hearing signs that hopefully in the back half particularly on the international side it could be a little bit on a sequential basis stronger than what we’ve seen.
But that’s all dependent on where the economy goes from here. But when you think about aggregates and some of the other markets, we’re very, very strong right now. And we’re ramping up our service there to meet the needs of the customers. So, tremendous growth that we’ve seen and we see a long opportunity to continue on that.
On the chemical side, little bit more weakness there and I would say that’s more consumer-facing, a lot of destocking. For many markets, I think our destocking right now we’re seeing declines that are quite frankly, probably more acute than what the underlying demand is. So my hope is as we get through that destocking events you’ll see more stabilization in some of the markets that have been weakest for us.
So, but internally, Joe has had the team focused on the customer. We are looking at how we can improve customer measurements. Measure what they are really focused on. And that quite frankly matters market-to-market. So, a lot of work internally with our technology team and customer service team of putting those metrics together and really getting out in front-end of customers and saying, what do you need from us? So we can win more market share.
Big effort on the small and medium-sized customers. We’re able to reach out to them. Of our customer service group, now that they have a little more time, less service issues out there. We’re using that their time to really reach out to the customers that don’t have that day-to-day interaction with our sales and marketing teams. So a lot of momentum around that.
And then I would say, finally, on the industrial side, and I talked about this a lot and we had a slide in the last earnings presentation, we’ve never seen this much activity in decades and a lot of momentum around that a lot of that will come to fruition in late ‘24 and ‘25. But we’re really, really pushing there and have a great, great team around that. That’s pushing. But we’ve seen a lot of activity. There’s clearly demand, particularly on the Southeast, or Industrial sites. And we did got a great inventory. We’re continuing to go out and rebuild our inventory, and that’s probably the biggest challenge.
Right now, we’ve been so successful as we’ve got to replenish those industrial sites and have those shovel rake sites for customers to develop. But excited about some of the emerging industries that are coming along EV. We obviously have the battery markets that we’re participating all those and then a new shifts, on the metal side. We’re seeing a lot of new development there and working closely with the customers. A lot of activity. We’re shifting in to growth mode and really leaning into it.
And I challenge the team every day. This is a, certainly, a backdrop where things are challenging, but customers are more willing in these environments. I believe that shift their share of from truck to rail and we’re seeing.
Ken Hoexter
Wonderful. Let me follow up, I guess on what you just mentioned, right. So, I guess on three parts. One is the new leadership, service and operations and it sounds like we might even throw a new one in CapEx. Joe’s been CEO now for about eight months, he is exceeding the – we think it was great input and Hunter. What’s changed from your point of view? Is it – it sounds like you mentioned small, medium-sized business, service levels has he changed the focus or trying to shift the culture of the organization toward one bar?
Kevin Boone
No, I think, day one when he got there and my first meeting with them, we had five core principles. We were focused on operating efficiencies that we lever we want to continue on that path. Asset utilization, critically important. First of all safety. We are not going to sacrifice safety for anything and quite frankly it’s challenged the team in more ways.
Moving forward, they use technology and look at ways where we can advance even quicker on the safety side. But on the flip side, the two areas which remain our core principles is the customer, and really employees. And there’s been a lot more focus on those two areas. Joe came from four, and they make things. He’s reminds us we don’t make things. Our people, our service and our products that were strong every day and the more engaged they are the better the products that we have.
And we’re feeling it. I am sure you could see a lot of the momentum and hear about it. We’re hearing it from our customers. A lot of positive response so far, but it’s early. Our customers are reacting. I think this will build on itself. But it’s fun going out in the field and it’s fun working with the operating team and seeing their energy now. And what that’s translating into some of the growth – early signs of growth for us.
Ken Hoexter
So, I’m going to jump back to that kind of Southeast comment, where you need to replenish. We heard from one of your peer railroads during earnings that they’re raising CapEx plan. So you’ve got a $2.3 billion target of CapEx of about 16% when your peers raised it up to 18%, 19%. Is that is that the new ballpark to where you need to be? Are you comfortable, where you are? Just trying to think what happens in CSR, when CapEx caught, came down to now, do we need to get back to rebuild levels and that’s a concern for investors and aware now where that the capital go?
Kevin Boone
I read it earlier. He was in the room. I think, I had to spend a lot of time analyzing their network, but I think we’ll – a lot of what they talked about is they need more capacity on the network and to handle the growth that they have it sounds exciting for them. Where we are today and Ed would be familiar with our network is, what we did in ‘17 is we reduced train starts. We have a lot of capacity to grow into and Jamie will tell you this every day a lot of our network or Seaboard or is a double track today.
So we don’t feel like there’s a huge investment from a network perspective that we need to make. If we can find investments that’s generally are smaller on the TRANSFLO side and other areas where it’s expanding our addressable market, we will do that all day long as we’ve seen the returns are tremendous 20%, 30% plus type of returns when we find an opportunity.
So, if we see the opportunity to take up CapEx it will be for those reasons. And not necessarily for more network, we don’t see that. We have a great plan in terms of our rebuild plan that we will continue on. But no spike in capital that we seeing going forward.
Ken Hoexter
Great to hear. So, service levels have just been so consistent and really more closer to the top of your five-year bands, lately, 1Q carload trip performance at 86%, intermodal up 96%. Does that mean there is still costs that are coming out of system as you run that efficiently? I guess is there room for improvements? How do you measure that compliance? Are they tight enough in your view, can you factor that further?
Kevin Boone
Yeah, I think, we work with the team every day on tightening those schedules, because the tighter those schedules, particularly on the intermodal side is some of the truck competitive side, you’re going to get truck every day. And so the tighter is the schedules and we look at those every day the more truck competitive you are so thick.
So, think there’s probably opportunity and we’ll continue to look at that. From a cost perspective and I think Sean mentioned this on the earnings call. We’d expect some incremental opportunity as we head into the second half of the year, whether it’s overtime car hire, all those things as you speed up the network tend to fall out of your cost base.
So, we have a lot of momentum there. You’ll start to see that probably accelerate in the second half of the year.
Ken Hoexter
Are you done hiring teeny employees?
Kevin Boone
Not done. You’re never done.
Ken Hoexter
But did you get back to your targeted 7,400. Yeah that 10% attrition rate. Your overall employees are down to 22,000 from 32,000 at the peak, but above your 19,000 trough, right? So you’ve rebuilt the base. You’ve gotten your TNE, if I’m right kind of and that’s where you want. You how do you feel about employee levels after the struggles of the industry?
Kevin Boone
We’re around 7,300 TNE today. So, about 100 short of the 7,400 that you mentioned. My team is doing their job. We’re going to need to hire more people. We have a lot of opportunity to grow. And obviously in that environment you need more people. And so that’s our focus. We’ll look at we’re entering the summer months and that’s a huge focus for us with vacations that others things to keep the network resilient.
So there’s still a lot of hiring going on. The replenish as you said the attrition rates, which hopefully are falling. We’re seeing a lot of stability in the attrition rates there. But they’re still pockets on our network where there’s opportunity to that we’ll need to add employees over time. And they’re working hard as we’ve done a great job. We call the ball very early on the need to hire.
I think everybody realizes it was a lot more difficult during the pandemic to do that. Then we all realize, but I think you’re seeing early signs of all the work, the hard work that quite frankly, our HR department and office team, did really go out and find people now on services. Back to those levels that to your point are approaching those levels that we saw before the pandemic.
Ken Hoexter
So, carloads are – I’m going to talk to near term for a minute. Carloads are down about 3%. Second quarter they slightly below our one and change target. Still the third best real performer. But yeah, and you’re almost 500 basis points, better than your regional peer. So should we think about some of that being share shift from given their accident, is it benefits of your good service? I guess, tucking your term was – maybe parse that a little bit.
Kevin Boone
We’re certainly leveraging our service product, which we think is industry-leading right now and that’s really resonating with our customers. The focus has always been, how do we expand the addressable market for us. And how do we go after that truck share, and we’re having – quite frankly we are having different conversations that we did over the last two years around that as customers are seeing the service are willing to give us more of their wallet share. It’s very, very early. I think we are seeing some customers willing – more willing to do it now. Others saying, yeah, I want to see a few more months of this. Or I want to see a few more quarters, that I had that discussion, but the early signs are there. We compete every day with our Eastern peer. And we have the best service product today and that makes us competing a little bit easier and we’re leading into that.
Ken Hoexter
So, given the way things are trending, it seemed like you switched from a kind of a GDP outlook to an RTM outlook. Maybe walk through your near-term volume outlook what you are expecting internationally. Intermodal, still seems a bit weak. And as Joe mentioned it was about a fifth – fifth of your revenue is half your volume. So, maybe just delve into kind of your thoughts?
Kevin Boone
Yeah, I think coming into the year, we’ve probably didn’t see intermodal as weak as it has been in the first half of the year and that’s clear. And that’s that was the driver of the guidance change. On the flip side, I think we’ve had a lot more success on the merchandize side, particularly really capitalizing off of the service improvement.
We certainly were modeling in an improvement through the year. I think that improvement has been stronger at the start of the year than what we even expected which is a positive and that’s manifested into better merchandize performance which quite frankly is – to your point is almost two-thirds of our revenue base.
And you know, coal still is very positive, volume story for us as well. So between those two, it’s I’ll take that mix shift any day. If you told me merchandise is going outperform and intermodal came in a little bit weaker I think that probably take that all day long.
Ken Hoexter
Yeah, let’s talk about that big picture right? Because, CSX right now moves about 6.2 million carloads give or take this year if volumes are somewhat flattish. It’s almost the same level as 2019, down from 2014’s peak of 6.9 million.
So, clearly, your network has capacity, right, to grow. And I think, we’re going to talk to rails throughout the day about the target is growth, right, that is always been. So what gets us to believe that rails can get back on that growth trajectory? Obviously we had coal, full 50% between 2011 and 2016 and you had to battle that. So, what gives you the confidence that we flip that into growth?
Kevin Boone
It is the show me story, right? We really haven’t proven it as an industry and so, we’ve got to put up the numbers. We got to put up the – we have to have commitment. You need to hear from our customers that we’re willing to grow, that we’re willing to open up new lanes. We are providing new service that they need those things. We’re out there delivering that message day in and day out and it helps have a leader that’s very, very focused on that.
I can’t tell you how many customers’ judgment in front of in its first seven months. But he has been out there a lot and it’s resonating with our customers. He was a customer. They like to hear that he understands some of their challenges. He would have liked to put more volume on the railroad during his time at Ford. So, those things are highly focused. You need to have Jamie and I aligned – we are aligned.
He is – we just had a meeting yesterday and we’re talking about specific customer and how we can open up given more capacity there. So, that alignment needs to happen internally and the teams are working really, really well together. It helps that we’re not putting out fires, like we have to along the network day in and day out and that we can focus on having a different conversation with the customer and so.
But at the end of the day, we got to perform and we can talk about it. But we got to put up the numbers, and I am confident that we’re building on the momentum. We’re having fun. Last two years, as times weren’t that much fun. But all that is really changing and people are feeling the energy inside and our customers are feeling it quite frankly.
Ken Hoexter
That’s great. I love the fact that you’ve got both the marketing had on now, but you’ve got your CFO had on in the past. So I can I can ask you minutiae questions and get real number answers. So, just, there’s a lot going on, right? You talk about the mix impact change, talk about losing I think, it was $300 million of accessorial revenues for the year, right?
How do we think about yields and as much as you can discuss it in terms of sequential change, right? Because you’ve got the loss of fuel, understanding, I guess well ultimately how do we core pricing follow through in this kind of market, right? And I think you got some of the mix issues with coal and things. Maybe talk a little bit about that overall?
Kevin Boone
Yeah, let’s break it down. First of all, our assets are – charges are in other revenue. So you can see, those are very transparent. So that’s when I look at yields you can – you don’t have to – you can easily adjust for that, but when you look at our merchandize business still obviously with what’s happened with inflation, so a lot of pricing momentum we’ve got to cover our cost.
And so that we had seen no change there. We’re having that discussion with our customers. We want to grow with them through pricing and through volume and price.
And if there’s opportunities to grow volume, and be partners around that, that’s certainly a discussion, we’re willing to have. So, a lot of momentum there. In some cases where we had 2, 3 contracts where obviously are renewing those in a different environment and taking advantage of that opportunity.
On the intermodal side, challenging backdrop. On the truck side and you’ll hear from a lot of other – of your lot of the companies today that’ll talk about that. Hopefully, we’re seeing a floor here. But we didn’t participate in these dramatic price increases that occurred on the trucking side on intermodal. And so, we typically don’t participate in the severe declines, either.
So we’re seeing stability there I would say in our spot business, which is a very, very small part of our business. Obviously, we’re seeing some softness, but otherwise, we’re just waiting for the demand. The return in the market to start to stabilize which there early signs that suggests that that’s what’s happening.
And then on the coal side, the MET price is probably the biggest swing factor as get into the year. They’re not as high as where they were in the first quarter. So we’ll see sequentially, probably more in the third quarter some RPU declines there if things don’t change from here. But still really healthy levels for that market that support volume and we have some new production coming online, which were really excited about into the second half of the year that we will take advantage of.
So, production should be up and that’ll be helpful and partially offset some of the RPU hit that we’ll on the MET coal side.
Ken Hoexter
When you talk healthy, you are talking volume side not necessarily, the pricing.
Kevin Boone
I mean, the pricing was historical – yeah, on the historical basis it’s very, very healthy.
Ken Hoexter
Okay. We just had some extremely good pricing last year.
Kevin Boone
Yeah.
Ken Hoexter
But you’d just kind of revisit what you said though, you don’t see the necessarily the impact in 2Q it can be delayed till 3Q based on that timing of those?
Kevin Boone
So when you look at our – particularly our MET portfolio, on the export side, some of that business prices on a quarterly basis. So that would have already priced in at the March kind of levels that we saw and then some of it is on a monthly basis. So, really, where you’ll see the largest impact from second quarter, and third quarter in that quarterly business, if prices remain here, kind of resetting a little bit lower.
Ken Hoexter
Okay, last five years, you’ve averaged about a 240 basis point improvement in your operating ratio from 1Q to 2Q. You’re starting from a soft first quarter with a 62% excluding the insurance recovery and real estate gain. Given the economic background, the loss of accessorials where starting point should we see above historical norm performance in second quarter? Is that something that can happen just given the starting point?
Yeah, you kind of touched on it. First of all, first quarter, I don’t think it was soft. It was a really, really strong performance. We’re really happy with the overall performance, particularly in the backdrop that we’re coming out. So very happy with that performance. But you made the point, when you adjust for the insurance claim and fuel surcharge lag about a 62.5 kind of base to look at. If you’re going to compare first quarter, second quarter.
And you know what, we’ve traditionally seen with the railroads and in particular our railroad is second and third quarters are typically our best OR quarters, less weather impacts little bit more volume on a seasonal basis. So, those factors that continues to hold. So we’ll see those factors off that 62.5 hopefully play out here in the quarter. The biggest swing factor is obviously our MET coal.
As you get into the back half of the year, you have the labor cost that will – the union will get their labor increase in July. So we’ll have to work to offset that. But on the flip side, you continue to have pricing momentum ply on your merchandise side that will drive some performance. And then, we’ll see where the market takes us. I’m more and more convinced every day that, the operating leverage is there.
We’re going to see that and so, our team is successful in bringing on more volume. You should see that drop through the bottom-line in a very healthy way.
Ken Hoexter
So there are a couple things I want to revisit with what we just ran through. Let me start on coal. We have a lot last year, right? You had – mine was closed. We had a strike at the Port Curtis Bay, right? It’s fully up and running now. Warrior Mine had a strike. Are you – is your network now fully up and running? Do you still have some that legacy impacts from that?
Kevin Boone
I mean, all three of those things when Curtis Bay fully up and running, made the capital commitments there. And the team is doing an amazing job up there and we’re running full out. And probably some more opportunity as the Allegheny mine comes on line and some other opportunities to get even more throughput through there.
And that was a discussion that Jamie and I and the team had yesterday is how do we get more through Curtis Bay, because what we’re seeing on the thermal market with obviously, the natural gas prices at the levels, they are today is more of our producers are wanting to shift some of their volume to the export market where it still remains healthy.
And so, how do we react to that? How do we get more through our terminals and we have a lot of opportunity there to do that. And then you talked about some of the strike issues. Those are, those are behind us. When you think about Warrior and then Sugar Camp, while it didn’t come back to full capacity. Remember half of their production is still kind of offline.
We’re at a lot healthier production than we were seeing last year. And we will TBD on whether, the full production will ever come back. I’m not sure it can. But certainly a much, much better place we are. We’re just seeing it in general a lot more reliability from our producers, they are well-capitalized now. They’ve been able to reinvest in their production. And so, just a lot less downtime unplanned outages those things.
Ken Hoexter
Okay, and then just to revisit your pricing on coal just I am unclear. I thought on the call you would mention $3,400 could hold sequentially steady. Is that – is that still the…
Kevin Boone
Yeah, I think that’s, that’s right. Given that dynamic that a lot of our quarterly business priced in that March – based on the March pricing.
Ken Hoexter
Yeah.
Kevin Boone
So you’ll probably see more of the step down from second quarter and third quarter.
Ken Hoexter
Okay. We kind of talked to intermodal, like expecting some of these headwinds to moderate. Is there signs of a floor – I want to revisit that. That seemed to – I know you started opening by saying, yeah, we think we’re in a recession. But are we – are there signs of a core of chewing up some of those inventories? Or are we still on the to think of it and seeing that pressure?
Kevin Boone
On the [Indiscernible]
Ken Hoexter
No, no, just overall intermodal.
Kevin Boone
Yeah, I think, I’m looking at this data daily and obviously you’re going to have some, some of your companies that are much, much more close to it on a daily basis. But we’re seeing on the export side, a slight tick up in volumes and what we’re hearing from our customers is some optimism. It varies from customer to customer depending on who you’re talking to.
But that we’re seeing a floor there. Obviously, there has been a destocking. If you look at some of their earnings and announcement that have come out, whether it’s Home Depot and others talked about very, very high inventory levels. Some are in a better place than others. But inventory levels have come down and I continue to believe that there’s been on top of, obviously a weaker consumer, a lot of destocking helping out there.
And so we’re not run rating at current demand levels today. We’re under running that and so there’s got to be a hopefully an adjustment up to those volumes that we will see in the back half of the year. The teams are working on a lot of interesting opportunities through that. I am hopeful on the second half of the year continue to bring new solutions and new opportunities there that we got to work harder to offset some of the softness in the market, provide new lanes, and new opportunities that create the solutions with our Western peers, as well.
Ken Hoexter
Yeah. Let’s switch over to safety, right? Obviously, a big issue in the in the market. Your peer has had obviously a couple of publicized derailments that have brought this to the forefront. I think Jamie noted, you are increasing HotBox detectors adding about 53, reducing the space from 60 miles to just under 15. I think legislation was talking about getting that under ten mandating two man crews. I mean we will certainly be talking about this throughout the day?
Just start off with safety. What – start up with what Jamie is talking about? What else you’re doing, and then maybe some reactions to the proposed legislation?
Kevin Boone
Yeah, I can, I think Joe was – while he was there about two days ago, in DC and he spent a lot of time up there, educating, right? It’s all about having a discussion about what the core problems are. What are the issues and finding solutions and working together, but dealing in with facts. And what each railroad is doing and we’re not all doing at the same way.
But we need to share it probably a little bit better across what we are doing as well. What we’ve done about across the HotBoxes detectors, is, we link them all together and we’re looking for trends and algorithms and studying that data is critically important. We can find patterns before you actually get a failure, right?
And how do you identify those in advance? And we think we’re leading the industry in that area and have led the industry and made a lot of Investments over the last five years to be there. So, we’re pretty proud of what we’ve been able to do, but you got to push the envelope forward and Joe is bring in a lot of new perspective from his experience in another industry.
And he’s got a lot of relationships out there and so, and we have a new leader in technology that has a different perspective that comes from an industry quite frankly that’s highly, highly focused on safety.
And so, we’re using all of that knowledge to push the envelope forward and come up with solutions. And again, we got to understand the core problems or the issues that cause the accidents. It’s all for those rather than make a knee-jerk reaction and I think we’re very focused on it. We’re trying to lead the industry in those discussions. Joe has been very good in spending a lot of time up there doing that.
Ken Hoexter
Yeah. The automatic track cars, automatic my track inspection cars. How many you have? What percent of the main lines look at each year? I just want to understand, kind of where we are in the development of some of the technology progress?
Kevin Boone
Yeah, I think, technology is particularly on an inspection side. So I can do some amazing things, right. But quite frankly, just the human eye can identify. I think at this point and I checked this with Matthew, as we have about eight that are running out there today. And roughly they can cover 50% of our Mainline track every week.
And you think about that coverage and constantly looking at the health of the network, on a weekly basis is really, really important and it’s a step change function from the inspection, from a human perspective it’s very, very important as well. But this is just on another level and helps us identify and repair, and be proactive.
Ken Hoexter
Wonderful, I’ve got couple more. We’ve got about five, six minutes left. Let me just see if there’s any questions from the audience. If you do, just wait till we get you a mic. No questions to start. I keep going then.
Quality carriers. You are – I think just about a year in or just over a year, yeah. Maybe talk us through that right? Are you seeing the conversion from the chemical to business to rail that you were talking about? You talked about the opportunity for TRANSFLO before is there any possibility of other commodities that you could think about that transition like that maybe just a little bit up to you talk about the investment and your takeaway a year later?
Kevin Boone
Yeah I know I talk to Randy quite a bit as obviously chemicals is our one of our largest end-markets and he really has different relationships than we do and being the largest truck carrier in that market. And so, I’ve been pleasantly surprised how well that business has held up both from a pricing and just the volume perspective very, very resilient.
And his customer base is focused on the stay poles, – of the world others that just aren’t, don’t have the volatility or the cyclicality of a lot of businesses. But he’s – he continues open up relationships for us. We can go in there and obviously we have a trucking and a rail service. This ISO tank product that we’re just quite frankly, took a little bit longer to get the product to market from supply chain issue, from the tanks coming from South Africa and we had some hold up there.
But those tanks are in the market today. He’s marketing on them. They’ve been very, very successful to the customers that have tried them out. This is an industry that’s typically slow to adopt. And so we’re seeing some that they want to test it over time, but the customers that have started to use it are seeing tremendous performance.
Randy, quite frankly is seeing performance. He didn’t expect from our Intermodal network. He was used to the traditional carload side and the Intermodal product, obviously can shoot across our network just as fast as his trucks can. And that’s been an eye-opener for him. And we’ve got a lot of initiatives. He’s got a long list that he just sent me a couple weeks ago, all the customers that are testing the equipment today.
And we just opened up our New Orleans terminal here about two weeks ago. And that’s going to be a key terminal for his business. If you think about the golf trucking, some of that business into that terminal and then shooting it through our network is going to be huge for us. So a lot of excitement there. The core business is holding up very, very well from both the price and a volume perspective as I mentioned. And he continued to grow the business.
Ken Hoexter
That’s great. Just because it was definitely a different one, right? Well as we’ve seen some historical going up and around for a while, but it seems some real truck acquisitions that were just completely different business and moving businesses and this seems to make sense if you can make that transition.
Kevin Boone
And then in terms of other markets, we like markets where there’s high touch, there’s high quality not your average pay trucker can’t come in and sore that customer. There are some natural adjacent markets that he can get into organically. That will look at think about when you think about maybe perhaps food-grade and other areas that just makes that that are natural – those things that he does today that we can intertwine with TRANSFLO and some of our other services that we do.
Ken Hoexter
I thought that you are using the name quality again. Balance sheet, your target leverage about 2.5 x you see yourself being more conservative in a backdrop of a slow down or your thought in capital allocation in a rising rate environment maybe talk about returns?
Kevin Boone
Yeah, I don’t think anything’s changed. First use of capital is always going to be our network and safety. But we’re in a fortune enough position that we generate a lot of cash flow and when we do have those growth in investments, those are the highest return on investments we can make. And so, I think it would be a positive sign if you saw that ends up a little bit if we’re able to find those opportunities.
They are generally small, thinking tens of millions rather than hundreds of millions of dollars opportunities. I wish there were hundreds of millions dollar opportunities out there and maybe one day there will be. And then, after that, we have a lot of cash flow to return to shareholders and we’ll continue to do that.
From a balance sheet perspective, I know Sean’s looking at this, but we don’t want to get out a whack with our peers and the industry. So we’ll continue to look at that. But nothing’s really changed. We believe the model has worked over the last few years, have an incredibly supportive board on that and we will continue to have discussions with them because at the Board level decision.
Ken Hoexter
Is there a target return level on these new Investments? Especially when talking about industrial development that what threshold do you talk about meeting?
Kevin Boone
Yeah, we do have a threshold. I am probably not going to make it public. But it’s very healthy. And the good news is we’re able to find things that far exceed that very healthy threshold that we have. We don’t want it to be so high that we turn away good projects then. But yeah, I think – I think those, I’m hopeful with the team we have that those opportunities will accelerate from here and the discussions with customers and we have a lot of whiteboarding discussions with our largest customers on the books for the next two, three, four months.
I hope as an outcome of that we will find even more opportunities for investment to really accelerate some of the market share gains that we anticipate.
Ken Hoexter
Last one from – for me and then we’ll wrap it up. But the move from we’ve seen kind of an extended move really since the widening of the Panama Canal, or Water East Coast on Intermodal, and clearly, share gains, especially as they continue through their negotiations at West we will talk them a bit quicker about that.
But, what are your thoughts on that? Is it is it permanent share gains? Is it, now that they’ve gotten used to the network, they kind of stay there? Do you see it going back? How does that?
Kevin Boone
No, I think it’s the East is going to outgrow the West. When you look at the investments that are being made in the ports on the East Coast, largely, when you look at the West Coast, LA and others, there’s not a lot of opportunity to expand. There’s plenty of opportunity if you haven’t been to Savannah, I would encourage you to go down there. It’s pretty amazing what they’ve done.
But all the ports on our East Coast are investing and we’re seeing it. It’s a trend that has been there for the last five, seven years. We see it continuing. There’s obviously some things going on in the world with China and other things where we are seeing customers shift their manufacturing diversify. And we think that helps the East Coast ports, as well as manufacturing kind of shifts around Southeast Asia.
You are going to bring it around in a different way. So we’re very excited. Our Inland Port strategy that our team has put together has been tremendous success. We ‘ll continue to invest in that, but see a lot of opportunity for our growth.
Ken Hoexter
So if I can just sum up and then I’d love to hear you sum up. But kind of where intercession volumes are down, but you’re happy to swap merchandize for intermodal, any day, pricing coal yields old through to 2Q then we can see some softness and so where could just given what’s going on with international rates. Operating margin ratio improvement can be better sequentially, just seasonally and because of the starting point, that’s kind of what I heard anything bad, or…
Kevin Boone
I just want to thank our operating team, because our service is standing out of the market and our customers are telling us every day that it is. And it makes my job a lot easier and makes our team and the excitement around that. The way that we’re working internally together is something that I haven’t since I have been at CSX. So, lot of momentum there and a lot of excitement.
Ken Hoexter
Great, Kevin. Thank you so much, Matt.
Kevin Boone
Thank you.
Ken Hoexter
Appreciate you guys for being here. Thank you, everybody.
Question-And-Answer Session
End of Q&A