July 18, 2018
Like last night’s All Star Game, yesterday afternoon CSX kicked off the summer earnings period with a blast, its Q2/18 results blowing away both Q2/17 (by ~58%) and consensus estimates (by 16%), and, judging by the hosannas on the call, even the “whisper numbers”. The reported OR of 58.6% (almost 5 OR points of YOY improvement) was likely, as CEO Jim Foote said, the best ever by a US freight rail (even adding back some real estate etc to bring it to ~60% would likely still merit that claim). CSX therefore dutifully raised its near-term guidance, albeit ever so slightly (revenues from “slightly up” to “up low-to-mid-single-digit”); they refused to up there critical, post-Investor Conference 3-Year Targets of a 60% OR (despite being there now) and revenues, etc due to the intermediate term unpredictability of export coal and their ongoing intermodal structuring efforts. It was, as Foote summarized in two words, a “great performance”, and one hopes that their announced celebration last night didn’t cause too much regret this morning.
However, not to be the Grinch here, there were a few things that were cause for a tiny bit of concern, aside from the generally conservative guidance (despite repeated and ultimately not only fruitless but repetitive and useless efforts to get Foote et al to change their 2020 Targets….
The safety record – a subject of future focus – was mixed: a 23% improvement in PI incidents but a 60% higher accident rate. I view this as more of an opportunity than a warning bell….
Intermodal was described as “dysfunctional” and needing “a ton of work”, even after the EHH-led shedding of 7% of the lowest return business last year. Again – this is an opportunity (though I worry a bit about the timing, for will the iron be any hotter than right now?)
Although the reported service metrics showed across the board improvement (velocity up 7% YOY, for example), on-time departures and arrivals both showed declines….
Volume growth of 2% compares with the industry’s 5%, and “relatively flat” domestic intermodal will likely show a similar relationship to NSC’s….
As was picked up by some, high (highest?) margin export coal grew by 38% YOY – and that was clearly a big (if undefined) boost to Q2/18 profitability….
Price was clearly up (same/store and “new contracts”) both sequentially and YOY – but was not described or quantified….
Demurrage gains will be strong inH2 – but that also means that “customer behavior changes” are coming slower than anticipated….
The tax cut was another big boost – and due to some state tax adjustments, the reported rate of 23.3% was 120bps lower even than expected
But that list (filled with as much future opportunity as present concern) shouldn’t take away from the achievements – which might best be summarized or explained by one line – volume was up 2%, but locos were down 13% and road and yard starts down 9%. Aside from coal (volumes up &%, though domestic decline actually intensified a bit), autos (really, pickup trucks) were up 2% in vols, 7% in revenues); forest products (+6/11), metals/equipment (benefitting from the tariffs, so far: +3/11) and international intermodal were bright spots. And now we have Mr (Biggie) Wallace coming in as CMO to help drive the numbers. Foote denied, as PSR vets are wont to do, that the PSR pattern is:
Growth focus (AKA “Post-Hunter”)
However, one pattern is clearly similar, especially to PSR at CN – a focus on merchandise first followed by a complete re-think and re-build of Intermodal which takes some time (into 2019 is my guess). This plan, as well as the ongoing line rationalization program (more announcements soon?), will be the lead to the next phase of the CSX story. If, in the meantime, they can continue to pull off results such as this one, this will be the something to watch indeed.
Norfolk Southern - it’s your serve….
Anthony B. Hatch