CSX in second-quarter 2021 reported an exceptionally low operating ratio (OR) of 43.4%, along with significant increases in earnings and revenue. The OR calculation included a credit against expenses resulting from the sale of certain property rights on CSX-owned line segments to the Commonwealth of Virginia for passenger rail operations. Adjusted to exclude the real estate transaction, the OR is 55.1%, still exceptionally low.
CSX’s reported OR of 43.4% is a 19.9 percentage point drop from 2Q20’s 63.3%, a 1,990 basis point improvement. Net earnings of $1.17 billion, or $0.52 per share, compared to $499 million, or $0.22 per share, in 2Q20, were more than double. Revenue increased 33% from the prior year to $2.99 billion, “driven by growth across all lines of business.” Expenses decreased 9% to $1.30 billion, and operating income improved to $1.69 billion.
CSX said the property rights sale to Virginia favorably impacted operating income by $349 million and EPS by $0.12.
Some observers have been puzzled by CSX’s reported 43.4% OR. Railway Age spoke with President and CEO Jim Foote, who explained it in detail. He said that, according to U.S. Securities and Exchange Commission rules, large transactions must be fully disclosed when reporting financials. The $349 million land sale to Virginia fell under that requirement, and as such was reported as a credit against expenses on CSX’s 2Q21 income statement.
“This was an unusual transaction that drove our quarterly OR down 11.7 percentage points,” Foote said. “Every quarter, we normally realize gains from real estate sales, but they’re relatively small, and we are not required to individually disclose them in detail in our financial reporting. The Virginia transaction was unusually large, and as such it had the net result of lowering the OR to 43.4%. Yet, without this large credit against expenses, our OR is 55.1%, a figure we’re quite happy with.”
COWEN INSIGHT: “QUALITY BEAT FOR EASTERN RAIL GIANT”
“CSX reported 2Q21 adjusted EPS of $0.40, which came in ahead of our forecast and the consensus figure of $0.37,” says Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl. “The company reported a $349MM GAAP gain on property rights which related to the sale of property to the Commonwealth of Virginia. Total proceeds are expected to be $525MM, including $200MM already received, with the remaining $200MM coming later this year. Adjusted OR of 55.1% came in above our forecast of 56.4%.
“2Q21 revenue was up 33%, which was led by its Automotive segment (+132%), mainly due to easy comps relating to the pandemic last year. Its intermodal segment grew 47% in the quarter due to tight truck capacity, continued inventory replenishments, and rail volumes from the East Coast ports. Coal grew 47% in the quarter off 44% increased volumes, which management cited was driven by growth across all markets. According to our carload data, QTD trends have cooled off for coal, but management cited a strong market despite some supply chain issues within the coal markets.
“The number of rail employees stepped down slightly sequentially, although management expects headcount to tick up sequentially in the back half of the year. CSX began a referral program that offers incentives to employees to bring people into the CSX network. The initiative appears to be off to a strong start with a lot more applications coming in the door. The labor market continues to be very challenged, which was expressed on the call and has been a main theme across our coverage so far in 2Q21.
“CSX repurchased 22MM shares in the quarter and reiterated commentary on plans to continue to return capital to shareholders. YTD, CSX has bought back ~$1.3B in buybacks and ~$400MM in dividends. Given the company’s good FCF outlook, we expect CSX to continue to be active in the market.
“Carload trip plan performance in the quarter was 69%, well below where it has historically been. For now, CSX has plenty of freight due to such tight capacity on the highway. Over the longer term, trip plan performance must improve dramatically to pull freight off the highway. Intermodal trip plan performance of 89% was strong in the quarter.”
“We appreciate CSX’s candor on the challenges of hiring employees in this market, and believe its approach to grow headcount and capture volume is strategically right-minded against a broadly capacity constrained supply chain,” says Susquehanna Financial Group’s Bascome Majors. “Remember, railroad unit labor costs are defined by multi-year union contracts.”
SFG took the same approach as Cowen for CSX’s OR, calculating the same number, 55.1%: “Adjusted 2Q21 EPS was $0.40, excluding the $0.12 previously disclosed gain on the land sale, $0.03 above us/consensus at $0.37. This is a slight operating beat vs. our model, with some help below the line. Total revenue rose 33% Y/Y with yields up 4%, RTMs (revenue ton-miles) up 24% and carloads up 27%. The adjusted OR of 55.1%, excluding 11.7 points related to the land sale, improved ~815bps Y/Y, and ~575bps Q/Q, ~320bps better than the five-year average Q/Q trend.”
“CSX delivered a solid beat for the quarter, but its earnings call was focused on cost pressures and hiring challenges plaguing every part of the supply chain,” Majors noted. “Starting with inflation, CFO Sean Pelkey was optimistic on cost containment for 2021, noting that CSX has been able to lock in the vast majority of unit costs for the year but did note cost pressures associated with infrastructure-related materials that its will look to offset with increased productivity. While management was clear that cost inflation and capex would not increase from current levels for 2021, trends for 2022 have the potential to increase, given supplier contracts that are currently based on lagging indicators.
“Turning to labor, CEO Jim Foote candidly addressed his surprise with how difficult it has been to hire or retain employees vs. his expectations earlier in the year. That being, CSX expects to gain some momentum on the hiring front in the back half of the year, with headcount on a net basis increasing sequentially in 3Q and 4Q. Overall, despite these supply-side challenges, CSX remained committed to serving its customers’ needs and hiring employees to keep pace with strong demand.”