CSX Optimistic About Traffic Growth

In taking a closer look at the financial performance of CSX in the first quarter of 2021, it becomes apparent that profits and revenue fell because declines in merchandise and coal traffic overwhelmed intermodal growth.

Nonetheless, during a conference call on Tuesday, company executives expressed optimism that traffic will grow overall this year due to a recovering economy shaking off the effects of the COVID-19 pandemic.

“We entered the year projecting volume growth in excess of GDP and still expect to achieve this target,” CEO James Foote said.

“We will continue to attract demand throughout the year, and based on the combination of the strengthening economic outlook and our focus on converting additional volumes off the highway, we now expect to achieve double-digit full year revenue growth.”

Quarterly operating income fell 7 percent to $1.1 billion while revenue declined 1 percent to $2.81 billion. Earnings per share slid 7 percent to 93 cents.

The operating ratio crept up by 2.2 points to 60.9 percent as expenses rose 2 percent.

CSX executives attributed the latter to the effects of employee COVID-19 infections, harsh winter weather, and a fuel surcharge lag.

Overall volume was up 1 percent for the quarter with intermodal traffic growing 10 percent on the strength of an increase in imports at East Coast ports.

Yet merchandise traffic fell 6 percent, largely driven by a 16 percent decline in automotive traffic and an 8 percent decline in chemicals traffic.

A global shortage of computer chips has hamstrung auto production in North American. The chips are placed in new vehicles.

Declines in chemical traffic were prompted by falling crude oil and frac sand shipments.

Coal traffic was down 5 percent, which CSX attributed to fewer exports.

Foote said going forward CSX is focused on improving its train velocity performance, noting that the pandemic and winter weather adversely affected crew availability.

Train velocity was down 11 percent while terminal dwell time was up 30 percent.

On-time performance, based on trip-plan compliance, fell for both intermodal and carload traffic.

Figures released by the company showed 85 percent of intermodal shipments arrived on time, down from 96 percent a year ago.

Merchandise carloads fulfilled their trip plans 67 percent of the time, down from 81 percent a year ago.

CSX operated a record 101 trains per day with distributed power and continued its trend of operating more freight on fewer but longer trains.

During the first quarter train length was up 13 percent and employment down 7 percent due to reduced need for train crews.

CSX’s Foote Optimistic About Traffic Growth

Like any chief executive officer, CSX’s James Foote put his best foot forward last week when addressing investors and the business press in discussing his company’s fourth quarter financial results.

James Foote

He spoke about returning to growth, record low operating ratios and booming intermodal traffic.

There were a few bits of good information in the fourth quarter numbers.

Operating income rose by 5 percent to $1.22 billion even as revenue dropped by 2 percent to $2.8 billion.

Earnings per share were flat at 99 cents. But traffic volume during the quarter rose 4 percent, helped by an 11 percent growth in intermodal traffic.

Merchandise traffic was flat and coal volume tumbled 9 percent.
As for the operating ratio, which measures expenses as a percentage of revenue, it improved by three points to 57 percent.

All comparisons are with the fourth quarter of 2019.

For 2020 as a whole, the news was more grim. Operating income fell 12 percent to $4.3 billion. Revenue dropped 11 percent to $10.5 billion and traffic was down 5 percent.

Intermodal was a bright spot with a 2 percent improvement while merchandise traffic declined by 6 percent and coal volume plunged by 24 percent.

The 2020 operating ratio was 58.8 percent, a slight rise of 0.4 points over 2019.

Foote expects both intermodal and merchandise traffic to outpace the country’s economic growth this year.

He said diverting traffic away from trucks will make that possible.

CSX executives expect merchandise traffic growth to exceed industrial production and they even think coal volume will show growth from 2020 levels.

Chief Financial Officer Kevin Boone said CSX is stepping up hiring locomotive crew members to be prepared for increased traffic volumes and to replace workers lost through attrition.

That might suggest more trains out on the road, yet crew starts in the fourth quarter were down 11 percent.

The railroad set a capital budget of $1.7 billion to $1.8 billion for this year, slightly above last year’s $1.6 billion.

CSX plans to rebuild 67 locomotives this year, a process that includes adding Trip Optimizer and distributed power capabilities.

Foote said technological advancements will make CSX “smarter, faster, and more reliable.”

This will include increased use of automated train and track inspection, new dispatching and fuel saving systems, increased intermodal terminal automation, new digital tools for employees and customers. 

CSX CEO Says Better Service Will Bring Traffic Growth

CSX CEO James Foote continued his “our future is upbeat” tour this week, telling an investment conference that substantial improvements in service reliability will enable CSX to grow faster than the overall economy over the long term.

James Foote

Speaking to the Stephens Nashville Investment Conference, Foote said internal and independent surveys of CSX shippers have found they view the service provided by the carrier as having been much improved over the past two years.

“What they’re getting in terms of service quality today is off the charts,” he said.

Foote acknowledged CSX has lost business in previous years to trucks because of unreliable or inconsistent service.

But now Foote projects that CSX should see above average growth in volume and revenue.

In response to an audience question he said that CSX would see gains that exceed the nation’s gross domestic product, a measurement of economic growth.

“Long term, yes, absolutely I think so,” Foote said.

He said shipping merchandise freight by rail is less expensive than shipping by truck.

Since 2011 the U.S. GDP has been 37 percent while CSX’s traffic volume has been flat.

Between 2011 and 2018, CSX’s merchandise volume grew buy 1.7 percent, coal traffic declined 42 percent, and intermodal business rose 26 percent.

The latter is a particularly ripe area for growth, Foote said.

With CSX intermodal shipments meeting their trip plans 98 percent to 99 percent of the time, the carrier believes that 10 million highway shipments annually could be diverted to its intermodal network.

Last year CSX hauled 2.9 million containers and trailers.

Intermodal trip compliance plans are measured from terminal cutoff to terminal availability.

If CSX is to see growth in its merchandise network it will need to get trip compliance for merchandise shipping into the 90 percent range in order to compete with trucks.

Foote said CSX is getting close to that but still have a long way to go to reach it.

“We will get that business when our service levels get reliable enough,” Foote said.

Another factor is that the economy will need to improve, particularly the industrial economy.

The latter has been hindered by, among other things, global trade wars.

Foote acknowledged that intermodal traffic normally surges late in the year but that has not been the case this year.

He attributed that to changing shipping patterns. “We’re in the peak season and there’s not a peak,” he said.

CSX Reports Big Jump in 3rd Quarter Earnings

CSX reported this week that its third-quarter net earnings jumped 95 percent to $894 million, or $1.05 per share. The comparison is with the third quarter of 2017 when CSX earned $459 million, or 51 cents per share

In a news release, CSX said its per-share earnings beat analysts’ estimates for the quarter.
The railroad said its operating ratio of 58.7 percent set a company third-quarter record. A year ago, CSX posted a third-quarter operating ratio of 68.4 percent.

Revenue in the quarter rose 14 percent over the prior year to $3.13 billion, which CSX attributed to “volume growth, increases in fuel recovery, favorable mix, higher supplemental revenue and pricing gains.”

Expenses dropped 2 percent to $1.84 billion, as expenses associated with increased volume and higher fuel prices were offset by efficiency gains as CSX continues to implement its scheduled railroading business model, company officials said.

Third-quarter operating income rose 49 percent to $1.29 billion from $868 million a year ago.

During an earnings conference call CEO James Foote said company officials are “very excited about the railroad’s strong performance.”

For all of 2018, CSX said it expects to reach 6 percent to 8 percent revenue growth, which Foote said would exceed what management anticipated.

“Only 8 months since our investor conference and — by almost any measure — we are ahead of where I thought I we would be,” Foote said. “I am proud of what has been accomplished and I’m encouraged by all the opportunity in front of us.”

Foote said CSX almost has met its workforce reduction target of 2,000 positions for 2018 and will continue reducing its employee rolls in 2019. He attributed that to expected efficiency gains. CSX employs 22,562.

Chief Financial Officer Frank Lonegro said CSX needs fewer people as it moves more tonnage with a smaller locomotive fleet and fewer rail cars.

“Clearly we are doing very well,” said Mark Wallace, CSX’s executive vice president of sales and marketing. “And service is excellent, the pricing environment is very, very good, customers are moving more freight back to the railroad — and that is a trend that will continue.”

Merchandise traffic was up 5 percent for the quarter while coal traffic grew 7 percent due to a 22 percent rise in export coal shipments.

However, domestic utility coal traffic fell by 2 percent and fertilizer traffic was down due to a plant closure. Intermodal traffic was up 3 percent for the quarter.

CSX said rail cars are spending less time in yards and trains are moving faster as terminal dwell times has fallen by 26 percent and average train velocity is up 28 percent.

However, there was little improvement in on-time originations, which remained at 85 percent. On-time arrivals improved 3 points to 64 percent.

The carrier said it has created a new service metric known as trip plan compliance, which monitors how well freight cars and intermodal containers and trailers meet their schedules.

That compliance was up 26 percent versus the first quarter and 13 percent compared to the second quarter.

“While we have made good progress, there’s plenty of room to improve,” Foote said during the conference call, noting that trip-plan compliance was in the upper 70-percent range for the quarter.

The railroad wants to get it closer to 100 percent, Foote said.

CSX said its real estate sales have increased by $52 million higher over last year largely due to the sale of some lines to short-line railroads.

The railroad said it expects to soon sell another 1,000 miles of railroad and continues to review its 8,000-mile systems for further sale opportunities.

Foote Expects Reliable Service to Equal Traffic Growth

CSX head James Foot told investors this week that with service reliability will come traffic growth.

Speaking at the Bernstein Strategic Decisions Conference, the CSX CEO said the railroad’s improving performance metrics show that the precision scheduled railroading model can work at CSX with its vast and far-flung route network.

“We’re in the early stages of a turnaround and making great progress toward our goals right now,” Foote said.

Among the numbers Foote cited was an industry-leading first-quarter operating ratio, record average velocity and dwell times, and carrying the same tonnage as last year with 1,000 fewer locomotives.

Still, Foote acknowledged that on-time performance is not where it needs to be and reliability of service needs to be increased.

Saying that too many industry observers are focused on weekly carload reports, Foote said CSX is only seeking profitable traffic.

“You can easily add a ton of volume to your railroad and look good on the charts,” he said. “But it’s more of a challenge to put higher-margin business on the railroad.”

Of all the traffic that CSX handles, Foote said his only concern is for domestic utility coal.

CSX has lost nearly $1 billion in revenue due to lost coal business as utilities increased their use of lower-cost natural gas. Foote expects the export coal business, though, to remain strong.

In an example of how the railroad’s new operating model has changed thing for the better for customers, Foote said cycle times for export coal train sets have been cut in half.

The use of distributed power has enabled CSX to combine three trains into two longer trains.

The current operating model creates a trip plan for each individual carload and intermodal container.

Foote said this approach emphasizes consistent on-time delivery for the customer rather than railroad-centric measures as train performance.

CSX is now providing a baseload service for merchandise customers, who pay a premium for trucks to handle other freight to make sure that it arrives on time.

Foote said that as the CSX merchandise network becomes more reliable, shippers will convert more traffic from road to rail.

Asked what effect the development of autonomous trucks might have on railroads, Foote said railroads are technologically ahead of trucking due to positive train control, line side sensors, a private right-of-way, and locomotive technology such as Trip Optimizer that essentially acts like cruise control.

“We could run the railroad with robots today, leveraging all of this technology,” Foote said.

One thing technology can’t control, though, is weather. Foote said CSX needs to harden its infrastructure to be more resilient in the face of increasingly powerful and more frequent storms.

In instances, areas have flooded that never flooded before.