CSX sets three all-time financial records in 2Q

By Jeff Stagl, Managing Editor

Despite a continued erosion in coal volumes and softness in several merchandise traffic sectors, CSX Corp. set three all-time financial records and beat analysts' consensus earnings projection in the second quarter.

The new records include operating income, which rose 2 percent year over year and reached $1 billion for the first time in the company's history; operating ratio, which improved 2.5 points to 66.8; and earnings per share, which increased 6 percent to 56 cents, 3 cents higher than most analysts expected. In addition, net earnings grew 5 percent to $553 million and operating expenses dropped 9 percent to $2 billion — primarily because fuel costs plunged 37 percent to $263 million — compared with second-quarter 2014 results.

A changing business mix reflected by steep drops in both domestic and export coal volumes, as well as reduced crude-oil production due to low natural-gas prices, continues to hinder financial performance, but the railroad posted excellent 2Q results "in the challenging market environment," said CSX Chairman and Chief Executive Officer Michael Ward during an earnings conference call held this morning. Strong service performance, productivity gains and payoffs from efficiency initiatives helped drive the record results, he said.

"While we saw challenges in a number of markets, CSX employees delivered an even safer, more reliable and more differentiated service product this quarter,” said Ward. "We expect the momentum in network performance we saw in the second quarter to accelerate."

However, the challenges caught up to CSX in several ways in the quarter. Revenue fell 6 percent to $3 billion and volume dipped 1 percent to 1.76 million units compared with results from second-quarter 2014, which was a very strong quarter for the railroad.

Coal revenue fell 15 percent to $630 million and volume declined 11 percent to 295,000 units; merchandise revenue decreased 6 percent to $1.86 billion and volume dipped 3 percent to 741,000 units; and intermodal revenue was flat at $450 million while volume rose 5 percent to 723,000 units.

Although the prospects for volume growth are quite favorable going forward for intermodal, food and minerals traffic, the outlook continues to be grim for coal business, said Executive Vice President and Chief Financial Officer Fredrik Eliasson. Since low natural-gas prices and utilities' high stockpiles figure to continue reducing domestic coal demand, CSX now expects domestic volume to decline about 10 percent for the full year, he said. In addition, global oversupply means export coal likely will total 30 million tons for the year, said Eliasson. CSX previously handled 39 million tons and 44 million tons of export coal in 2014 and 2013, respectively.

Given the coal challenges, the operating ratio record CSX set in the quarter was "particularly impressive," said Morgan Stanley analyst William Greene in a report issued late yesterday.

"Ultimately, the 2Q results reinforce our belief that CSX can effectively leverage pricing and productivity gains as an effective means of mitigating ongoing coal headwinds," he said.

Longer term, CSX expects to register a mid-60s operating ratio for a full year.