CSX - The PSR Gift Keeps on Giving
April 18, 2019
CSX provided a rousing leadoff success for itself - and the Rail group - in the face of the many headwinds discussed in the Preview (not to mention the obvious one that I forgot in looking at extrapolating Q1/19 results into long term trends – the seasonal weakness of the first quarter itself). The CSX Q1/19 earnings headlines – a 31% YOY growth in EPS, 11% above consensus, and a 420bps improvement in the OR to 59.5% - are only partially overstated by the triple-benefits of real estate, successful resolution of both a “customer dispute” and a Railroad Retirement tax issue, which added up to somewhere in the range of 1.5 to 2 OR points. Still a good job, worthy of the many congratulations echoing in the webcast (even if that’s not really appropriate), and a sign of how PSR is evergreen…. CSX has clearly set the expectations trend for its US peers, at least to the financial community (wait till we hear from Canada next week)o. In terms of my key questions I didn’t get much joy – not much on price (“strong”) and very little data at all, in fact. Capex was down 4% in the seasonally marginal quarter, which wasn’t bad given the decline in PTC spend as that buildout nears completion, but also against easy comparisons. CSX reiterated its FY19 targets (low-single digit revenue growth and a sub-60 OR). Naturally the “Dumb Question of the Webcast” award went to the habitual winner on the habitual topic of “Can’t your OR go even lower?”….Real estate and line sales combined to be 5% lower though CSX said there is still a healthy pipeline (and a ready list of buyers, I can attest).
Other key trends from the results and the webcast:
Operations improved “both sequentially and year over year” – Velocity increased 17%, dwell decreased 14% (and this despite likely, undiscussed, poorer interline service from the underwater western carriers). Safety improved significantly (P/I rate by 32%, the accident rate by 35%). On time originations was flat (at 81%), but on-time arrivals improved 12% to 64% (hmm….). That will be forgiven by shareholders if not so much by shippers when both cars and locos on line decreased by 10% and headcount was reduced by 5%, and expenses declined by 2% (on flat volume as expressed in units and GTMs).
The volume side of the house was interesting – given all of the variables. In units, 6 categories were up, one flat (metals, surprisingly) and two down – fertilizers (-aid to be a timing issue; perhaps related to ‘19 planting/export disruptions? The other was intermodal, going through a second year of purges said to be a little like 2018 (~7% of the base, again). There’s more change to come in terms of the team – CMO Wallace said they were “a trade or two away” from finalization.
Intermodal still churning - last year CSXI was able to show growth above the de-marketing line (the equation being -7+9=+2). For Q1/19, units were down 5%, however despite international (“pre-buying”) strength, likely not instantly repeatable. And, as was pointed out, revenue/unit (“yield” – not price, which is a component) was flat for IM (+5% for CSX as a whole); that’s surprising given what we expected was a an improved quality of the redone book of business….On the positive side CSX did say that the secular growth rate for domestic intermodal was in the high single digits….and perhaps by the end of this year, or early next, we’ll see signs of the new franchise inflection point. But I think this is very interesting – CSX sees IM as non-core (see below); what does that mean for NSC, a year (or so) behind on PSR adoption but with huge sunk costs in developing their branded domestic IM business….
There were a lot (too many) questions on export coal, which was down only 1% for Q1/19, but shows some signs of future weakness, long expected.
CSX insisted, again and again and again, that PSR was designed to jump start their merchandise business (“the core”); that’s where they see the biggest opportunity (pricing is now still some 15-20% below truck). In recent years it’s been anything but, but this is the PSR specialty (see CN). The recent -3% annual CAGR in short line business was called “unacceptable”. Q1/19 results perhaps show a turnabout – merch volumes up 3% (and revenues up 6%).
Demurrage was still at the $150mm rate – which CSX says will start to trend down towards the end of the year (due to customer behavior changes, they say) – we know that the STB and every trade association in DC is watching….
Anthony B. Hatch