CSX Solid - Mea Culpa

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Greetings;

CSX:  So a few “Mea Culpas” are in order – one, CSX almost beat CP for lowest OR in the quarter, coming in just short (59.5% in Jacksonville, 59.2% in Calgary).  Second, I lumped CP & KSU together as “outliers”, rails that produced spectacular first quarters before the C19 effects overwhelmed their early-year volume gains.  But CSX joined them on the Q1/20 podium, parlaying flattish volume and tremendous cost-cutting to produce an 80bps OR reduction, and with 6% fewer shares, an EPS decline of only 2% (much better than I had feared, and 6% better than the Street).  Revenues dropped 5% on a 1% drop in volume  and what appears to be, outside of coal, inflation+ pricing(and reduced demurrage revenue strengthening their case for “behavior modification”)-  that was really a tale of three cities, if you will:

  1. Coal continued its secular decline, down 15% in volume and 25% in revenues, hastened domestically (16%) by low NG prices (just wait), and in those high margin exports (-13%) perhaps by earlier C19 impacts.
  2. Merchandise, the heartbeat pf PSR, was up 2% in volumes (+3% in revenues) despite the 10% drop in cyclically challenged/C19 shut autos and aided by ethanol (just wait – but ferts should somewhat compensate) – but a sign of what we can possibly look forward to after the pandemic.
  3. Intermodal volumes were flat!  Hallelujah! The two-year repositioning is over (just in time for C19 demand destruction) but still….I cannot wait to compare to NSC next week….
  4. But of course, that was all before C19 (MTD volumes down more than 20%).

 

Operationally CSX shone brightly, as we have come to expect. All 4 KPIs improved YOY (velocity by 4%, dwell by 3%, cars on line by 7%.  Safety showed big gains similar to what we saw at CP – injuries by 22% and accidents by 34%.  They showed terrific fuel efficiency, a real industry target, but I think not the best, as they claimed, in an apples-apples comparison, say mes amis to the North.  But the best was where operations meet service (where the wheel meets the steel): On-time originations reached 91% (+12%) and arrivals 84% (+5%) – and Trip Plan Performance (the PSR star stat) for Carload in April was 84.4% (it was 9% better Q1 YOY) and in Intermodal fully 98.4% (Q1 was 23% better, YOY).  And they did this with 7% fewer heads (L&F expense was down 10% YOY Q1).  CSX plans an MS&O focus over the course of the year, and of course had modeled various recession/recovery scenarios (“all of the alphabet”, CEO Jim Foote said).

 

No Slash and burn to investment! Best of all – they are only “studying” their planned $1.6B Capex plan!  Their confidence that they had terrific FCF generation, strong control of their operations, and would ‘emerge stronger” after the pandemic came through throughout the webcast, but, to me, no more so when they didn’t, as had been rumored, slash their 2020 Capex.  This is a long term game – and CSX with perhaps the highest percentage of shorter-term investors over the past two-to-three years seems to get it.  No, it wasn’t “Tony Hatch Day” in Jax, - after all, they are still “evaluating” their plan, but expect to be at the lower end of their $1.6-1.7B (January) estimated range.  One good question revolved around whether their south/eastern network might benefit from several states seeking to “open back up” sooner than the rest, but Foote pointed out that we should follow how industries (and supply chains) open, not just states (and one of the letters he said they modeled was “W”, which might become synonymous with “Georgia” though of course, I hope not).  On the other hand, Foote saw near and re-sourcing as accelerating trends (and the US South is prime territory) and essentially said they have fixed their IM in time for more highway conversion/e-commerce opportunities to come.

 

Also of note:

  • There were a couple of tech glitches – we are all learning this “work-at-home” thing – and at least one top officer appeared to be distracted by his children, which is certainly forgivable.
  • “Decremental” – NO!  Resist!
  • Although we look forward to NSC next week, we move to Omaha tomorrow (Wednesday) morning, first….
  • Sign up for Twitter and my thanks to Commtrex: @ABHatch18 is my handle. This is the direct URL link:  https://twitter.com/ABHatch18.

 

 

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com 
212.595.0457/ 917.520.7101 

 https://twitter.com/ABHatch18

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