Ongoing drop-off in coal leads to earnings declines for CSX

Jacksonville, Fla.-based CSX reported it had fourth quarter revenue of $2.781 billion, which was down 13 percent, or $411 million annually, with earnings per share of $0.48 off 2 percent annually and ahead of Wall Street estimates of $0.46 per share. The company cited various factors for the revenue decline, including pricing gains being offset by the impact of lower fuel recovery, total volume down 6 percent at 1.655 total units, and what the company said was a continued transition in its business mix.

CSX also said its total expenses dropped 13 percent, due largely to reduced fuel prices, lower volume-related costs and efficiency gains, which led to its 12 percent decrease in operating income at $791 million, although its operating margin fell saw a 20 basis point improvement to 71.6 Fourth quarter net earnings of $466 million were down 25 percent.

Full-year 2015 revenue at $11.8 billion was off 7 percent, coming off of a record-breaking $12.7 billion in 2014, with operating income down 29 percent at $3.613 billion, net earnings up 2 percent at $1.968 billion, and earnings per share up 4 percent at $2.00. Operating income was off 1 percent at $3.613 billion, and operating ratio was at 69.7 for its first full-year sub-70 operating ratio.

“Over the past five years, CSX has transformed its business to continue delivering solid results despite the global energy transition,” said Michael Ward, CSX president, chairman, and CEO, said on the company’s earnings call today.

That was made clear by the company’s fourth quarter coal revenues falling 38 percent to $449 million.

Ward added that the company’s solid full-year2015 performance was achieved despite the challenges in the energy market, low commodity prices, and the strong U.S. dollar that impacted many of its markets.

“[2015] revenue of $11.8 billion reflected growth in intermodal, automotive, and minerals, which partially offset the continued declines in coal,” he said. “Improving service, aligning resources and costs against a lower demand environment, and driving efficiency gains of more than $180 million helped generate operating income of nearly $3.6 billion and our first full-year operating ratio of under 70 percent.” 

Frank Lonegro, CSX executive vice president and chief financial officer, said on the call that the 13 percent decline in fourth quarter revenue was driven mainly by a $198 million decline in fuel surcharge recoveries and $175 million from the impact of lower volume.

Same store core pricing gains, which CSX defines as shipments with the same customer, commodity and car type, and same origin and destination, were up 4.1 percent annually in the fourth quarter, and merchandise and intermodal pricing was up 4.5 percent.

Lonegro said these gains were more than offset by the impacted of negative business mix, with coal driving the majority of the 6 percent quarterly volume decline.

“Low natural gas prices, coupled with the impact of significant flooding in South Carolina, impacted domestic coal volumes, while low commodity prices and the strong U.S. dollar challenged export coal in our merchandise markets,” he explained. “We continue to see strong core pricing.”

For the first quarter of 2016, Lonegro said CSX expects volumes to decline, with a challenging freight environment to continue, due to the headwinds associated with coal, low commodity prices, and a strong U.S. dollar are expected to more than offset market growth.

Ward added that CSX continues to deliver solid results for its shareholders despite the transformational declines in the energy environment challenging market conditions.

“2016 will be a more challenging year,” he said. “Volume for the first quarter and full-year will decline as growth in some markets continues to be offset by the significant impact of continued coal declines, low commodity prices and a strong U.S. dollar. We are taking necessary actions to manage our business in that environment, including making structural and network-wide changes to manage resources and costs with business demand, driving further efficiency gains, and remaining focused on strong pricing that reflects the value of CSX’ services.”

And Ward said that in response to the expected challenges in 2016 CSX has decreased its capital budget by more than $100 million, with the company expected to invest $2.4 billion this year as it remains committed to preserving safety, service, and efficiency for both customers and communities while positioning CSX for the future.

“As we look to the future, this company will continue to transition its business toward long-term profitable growth opportunities in the merchandise and intermodal markets,” explained Ward. “In that regard, we remain focused on achieving a mid-60s operating ratio longer-term as we execute our core strategy of meeting or exceeding customer needs to support strong pricing for the value of our rail service and continuously improving operational efficiency. With those efforts, we are confident that CSX will continue to be a preferred service provider for customers who face a growing population, a more integrated global economy, and the need for more reliable, more sustainable supply chains.”