advertisement

---

During a first-quarter earnings Webcast and teleconference this morning, CSX Corp. Chairman, President and Chief Executive Officer Michael Ward said the company is “encouraged by what we see” in the business environment of late. Based on the strong quarterly results posted by CSX — the first Class I to report 1Q financial performance — investors and rail industry observers likely are encouraged that the large-railroad sector is moving past the weak revenue, earnings and income generation that colored all of 2009.

CSX reported first-quarter earnings per share from continuing operations of $306 million, or 78 cents per share, up 22 percent compared with $254 million, or 64 cents per share, in first-quarter 2009. Operating income rose 21 percent to a first-quarter record $634 million, traffic volume increased 5 percent to 1.5 million units and the Class I’s operating ratio improved 2.3 points to a first-quarter record 74.5.

“Our focus on safety, service and productivity has positioned CSX to produce strong results as the recovery continues," said Ward. “We believe the recovery is sustainable.”

The railroad also reported first-quarter revenue of $2.5 billion, up 11 percent year over year. Analysts polled by Thomson Reuters had anticipated revenue of $2.38 billion and earnings per share of 70 cents.

Automotive revenue skyrocketed 79 percent to $170 million as volume soared 64 percent to 74,000 units; intermodal revenue jumped 20 percent to $323 million as volume rose 14 percent to 500,000 units; and merchandise revenue increased 11 percent to $1.2 billion as volume rose 7 percent to 539,000 units.

Coal revenue declined 1 percent to $736 million as volume fell 13 percent to 373,000 units. However, volume is expected to increase for the full year because coal stockpile levels are moderating, natural gas prices remain low, and export and industrial markets continue to strengthen, said Executive Vice President of Sales and Marketing Clarence Gooden.

The lone negative on CSX’s 1Q ledger: operating costs, which rose 8 percent year over year to $1.86 billion. Labor and fringe expenses increased 10 percent to $729 million even though headcount declined 6 percent to 29,310 vs. first-quarter 2009’s 31,175. Incentive compensation for both management and the contract workforce went up, and health and welfare costs rose on a year-over-year basis, said EVP and Chief Financial Officer Oscar Munoz.

In addition, fuel expenses ballooned 48 percent to $283 million as diesel costs increased more than 50 percent. On a fuel-adjusted basis, total operating costs would have risen just 3 percent, said Munoz.

In terms of operating performance, CSX kept its network fluid during the quarter despite severe weather challenges, said EVP and Chief Operating Officer David Brown. Although year-over-year on-time originations fell from 83 percent to 69 percent, on-time arrivals tumbled from 79 percent to 67 percent, train velocity dipped from 21.6 mph to 20.9 mph and average terminal dwell time rose from 24.1 hours to 25.8 hours, total crew starts dropped 2 percent, he said.

Dealing with three severe winter storms in the mid-Atlantic region pressured volumes, impacted service and resulted in additional labor, fuel and other related expenses, said Robert W. Baird & Co. Inc. analysts Jon Langenfeld and Benjamin Hartford in a report on CSX’s results.

“[But] CSX still managed 1Q upside, which speaks to the strength of the recovery and the potential for realized operating leverage given recent network efficiency initiatives,” they said.

CSX expects more upside as the year rolls on. The Class I is projecting double-digit earnings growth in 2010 as volume and revenue gains strength, and margins expand.

“Most markets are rebounding strongly from lower 2009 levels,” said Munoz.

For more insight on CSX’s preparation for and anticipation of an economic rebound, follow this link to read the cover story (“Assuming a higher position”) that appears in Progressive Railroading’s April issue.

— Jeff Stagl