CSX 1Q22 Earnings Soar on Lower Volume

Written by William C. Vantuono, Editor-in-Chief
image description

CSX photo

CSX’s first-quarter 2022 financials included whopping increases of 21% in net earnings and 26% in diluted earnings per share, despite a drop in volume.

CSX’s 1Q22 net earnings of $859 million, or $0.39 per share, compared to $706 million, or $0.31 per share, in the same period last year. Operating income was $1.28 billion compared to $1.10 billion in the prior-year period, a 16% increase. Revenue reached $3.41 billion for the quarter, increasing 21% year-over-year, as an overall revenue-per-unit increase of 24% more than offset a 2% decline in volume. First quarter operating income included $17 million of expense related to increases in environmental reserves and a $20 million gain from property sales recognized from the 2021 transaction with the Commonwealth of Virginia. (Download the Quarterly Financial Report below.)

CSX’s operating ratio increased from 60.9% in the prior-year period by 150 basis points to 62.4%, “including the impacts of the acquisition of Quality Carriers and higher fuel prices,” the company said. A total expense increase of $419 million included roughly $215 million from the Quality Carriers transaction and about $110 million of fuel price impact.

Revenue gains in eight of ten categories reflected “strong pricing and higher fuel surcharge,” CSX reported:

Chemicals increased 16% due to higher revenue per unit and more shipments of core chemical products, partially offset by lower shipments of crude oil and other energy-related commodities. 

  • Agricultural & Food Products increased 11% as a result of higher shipments of ethanol, vegetable oils, and food and consumer products.
  • Forest Products increased 4% as higher revenue per unit more than offset lower shipments, primarily of building products.
  • Automotive decreased 4% due to lower North American vehicle production, which continues to be impacted by shortages of semiconductors and other parts. 
  • Metals and Equipment increased 6% due to higher scrap shipments and increased revenue per unit, partially offset by lower steel shipments. 
  • Minerals increased 15% as a result of higher shipments of aggregates and cement.
  • Fertilizers decreased 2% as declines in long-haul fertilizer shipments were only partially offset by increased short-haul phosphate shipments. 
  • Intermodal increased 13% due to higher domestic shipments driven by truck conversions, which more than offset lower international shipments. 
  • Coal increased 39% as higher export benchmark pricing more than offset lower shipments of domestic coal and international thermal coal.
  • Other Revenue increased 41% due to higher intermodal storage and equipment usage revenue, partially offset by lower payments from customers who did not meet volume commitments.

In terms of industrial development, CSX in 2021 put more than 90 new facilities and expansions in service, representing $3.1 billion in customer investments. There are currently more than 500 projects planned or under way.

Hiring also increased. As of April 18, CSX’s T&E (Train and Engine Service) headcount averaged 6,629, compared to 6,432 in 1Q21. The average number of employees in training and the number of conductor promotions increased significantly.

Posting on-time performance of 87% for intermodal trip plans but only 64% for carload, CSX said it is “committed to returning service to pre-pandemic levels. COVID-related mark-offs are now minimal following a January peak.” 

CSX’s 1Q22 free cash flow was $976 million, a 4.5% increase from 1Q21. The company made share repurchases of $1.016 billion in the quarter, 85% higher than in the prior-year period, and paid $218 million in dividends to shareholders, a 2.4% increase from 1Q21.

The railroad also realized safety improvements, with injury and accident counts close to a “record first-quarter performance.”

COMMENTARY

Jason Seidl, Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor: “CSX topped expectations on the top and bottom lines to kick off rail earnings, with financial outlook of double-digit revenue and operating income growth suggesting healthy demand (industrial and consumer) while the eastern rail giant continued to lean heavily into pricing. We continue to favor rails as the transport play through Q1 and reiterate $40 PT and Market Perform for CSX.

“CSX reported adj. EPS of $0.39, above our forecast and the consensus estimate of $0.37. Adj. OR was relatively in-line with our expectations, increasing 150bps due to the impacts of the Quality Carriers acquisition, and the nature of OR degradation in a rising fuel environment. Management called out high fuel surcharge revenues as a tailwind in the quarter, which we expect to continue to be a tailwind in the near-term. As expected, there was as $20MM gain from property sales related to the Virginia transaction. Revenue growth of 21% was driven by yield, as volumes declined 2% in the quarter, as well as the contribution of Quality Carriers (which was acquired by CSX effective July 2021).

“Coal revenue increased 39% in the quarter despite volumes declining 10% in the quarter. This was largely driven by higher export coal benchmark prices, partially offset by domestic and international thermal. There were some limiting factors that softened the volumes for CSX (disruptions at an export facility) but management stated that coal demand remains strong (particularly given the conflict in Eastern Europe and how it has impacted energy prices), with capacity expected to be added in the coming quarters. We model as such, increasing our coal volume assumptions sequentially through the year (remaining cautious on 2023), while capping yield in 1Q, to sequentially step down in 2H given commentary on the call.

“Labor was highlighted on the call, as headcount was up ~1% sequentially as management’s focus was to get more T&E employees hired; the labor market continues to be extremely tight and many pre-COVID employees haven’t come back into the workforce yet. In the quarter, intermodal trip plan performance was 87% on time, and carload trip plan performance was at 64%, both sequentially worsening. CSX did state that these metrics are starting to improve so far in Q2.”

Railroad Economist and Railway Age Contributing Editor Jim Blaze: “Looking at the source of the business—the service to customers—Carload Trip Plan Performance of 64% on time is an embarrassing grade. At one point a year or more ago, CSX as expected was above 80%. That’s a terrible regression. What shippers of valuable commodities are willing to rely upon a carrier with a near-one-third failure rate? Not too many in today’s logistics world, and practically no one with another choice when shipping perishables. Shareholders really ought to be asking questions about how this pattern is going to generate promised long-term rail carload growth.”

Chris Rooney, Vanness Co.: “It struck me so directly when I saw an recent railfan video of a 19,200-ton CSX freight on the ex-New York Central Water Level Route eastbound out of DeWitt Yard. The dispatcher asks the engineer, ‘Do you have enough power?’ and the engineer answers sarcastically, ‘Oh, sure thing’ or to that effect. Thereafter, we see 10 minutes of a train starting and grinding up to about 12-15 mph—really boring but a necessary revelation. Pre-Al Perlman, the NYC ran yard-to-yard, literally dragging the tonnage along as it accumulated and paying most of its attention to moving wildly unprofitable passenger trains. That was in the mid-’50s, 70 years ago, and here we are again. Being charitable, many of Hunter Harrison’s ‘intuitions’ may have been premature, and others may be misconstrued. It may simply not be possible to maximize CSX’s returns by rigorously applying PSR to the exclusion of all else. And it is questiinable if it is being correctly applied even now. Example: Is the 19,200-ton train PSR or ‘hold for tonnage’? And is that the result of deliberation or running out of crews? CSX is an enormously complex company, more so because it is really two (possibly three) railroads in one, basically north-south and east-west, and they are less than optimally knit together. What is precious in such a situation is institutional knowledge. I believe that is no longer in evidence as it was half a dozen or so years ago.” 

Download CSX’s Quarterly Financial Report

Tags: ,