CSX leads off well; Quick Takeaways

January 16, 2019

Greetings,

CSX – naturally – beat expectations for Q4/18, growing by 58% YOY, 3 points above the Street.  The OR improved by 480bps to 60.3% for the quarter; confusing (for me) that was also the FY OR.  CSX sees that FY60.3% as more realistically being ~61% given the lumpiness of RE & Line sales, etc.  therefore, CSX guided towards a sub-60% OR next year (thereby achieving the 2020 goal a year early).  That appears to suggest the end of the wild, multi-hundred OR point reduction period (2017-18), but the new long term OR goal isn’t clear, in order to balance with growth (and that’s a good thing, despite some plaintive analyst bleats on the call).  Free cash flow jumped 88% FY18 and/but cash distribution jumped even higher (102%; the hard numbers were $3.2B and $5.4B); CSX announced another $5B buyback program to replace the just-completed one.  CEO Jim Foote stated several times that their 2019 Guidance of low single-digit revenues came from reading the same headlines we all do, and that repeated talks with customers suggested underlying economic strength 9and ’19 will see much lower fuel surcharges in the revenue mix). 

The beauty of revenues – and private jets.  Revenues grew 10% on 1 3% volume gain (not bad considering the continuing de-marketing effect, etc).  Every group grew in both units and revenues (except fertilizers, as expected).  Coal was helped by exports (volumes up 3%, revenues 8%), which contributed nicely to the overall margin; CSX hopes to see a flattish export market (low 40mmts) this year.  “Pricing remained strong”, as we would expect, both in this environment and from PSR veterans.  Intermodal grew volumes 2% (revenues 4%), but given the 7% of the business cut out, the former number can be read as more like +9%.  That same pattern should continue in 2019, as the latest (Jan 3)  lane shrinkage package takes full effect; the hope is that 2020 is the first normal IM year.  “Other” revenues jumped 39% - that’s the new hot topic of supplemental fees, assessorials, and demurrage.  Mark Wallace, CMO, will is scheduled to be here at MARS (Midwest Association of Railroad Shippers)  in Chicago at 8am to discuss this and other CSX/PSR things; I sure hope the government shutdown doesn’t affect his TSA clearances at the airport….

Operationally it was obviously a solid year, although Ed Harris want in the call to take a bow.  Notably expenses shrunk by 2% despite the unit growth, safety improved (FRA reportables by 36%, for instance) and velocity gained 17%, dwell shed 13%.  However, on-time originations improved, but by a point to 78% - and O-T arrivals declined sequentially to a still not-great 58% (YOY better by 2 points, to be fair). All this with a 6% reduction in headcount (which is likely to stay around that rate of natural attrition in the next few years).

Other quick thoughts:

  • Capex is planned down 14% - but in part that represents a higher 2018 number (PTC, opportunity) than was indicated in last year’s Analyst Conference.  I truly hope we see a pattern developing here….Those numbers ($1.6-$1.7B) do not include anything for the Howard Street (Balto) tunnel….

  • CSX cited “line sales” in its revenue gains (and some lease conversions) but we are not hearing much about sales of the announced segments – in fact we hear that one of the original packages deal fell apart at the goal line.  Watco is happy with its Decatur line deal, however.

  • The issue of regulation/re-regulation was raised, in terms of the STB scrutiny of demurrage (etc).  Foote correctly pointed out that there wasn’t a case before the STB, just info-gathering – and that most of CSX (and freight rail) business is under contract. 

    • The Matt Rose chat at NRC was mentioned, but only obliquely.  Why?  Because it was only known to the Street because of Foote’s favorite magazine, Trains.  On the other hand – as readers of last week’s note know, I was there (being one of the advantages I have as an independent).  And I actually interviewed Matt again in a “Fireside Chat” this morning at MARS

    • Matt’s concern on broader de-marketing and what that will mean to a more aggressive STB (for example, if both CSX and NS proceed in similar plans and thus can be seen as getting around their common carrier obligations).  Given the de-marketing focus of CSX is centered around (regulation-exempt/highway competitive) intermodal, and that is NSC’s strength (we’ll know more on February 11!), I am slightly more sanguine on the issue than Matt but his point is well reasoned (and his claim that PSR has not improved interline service to his BNSF is alarming – and his call for more capex rings loud and clear to me).

    • A new regulatory threat from Congress?  Joining a more aggressive STB and RTA, Hill sources here tell me that the presumptive Railroad Subcommittee leadership in the New Congress plan to hold hearings on Amtrak/NEC; Chinese railcar manufacturing – and on PSR (from a shippers point of view; the scripts were written years ago but will be dusted off along with the fake tears).  In H2/19 we may see  hearings on PTC, depending on the rate pf progress.  In  any event, a new front, if less dangerous, might be opening on the re-regulatory battlefield….

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com