For CSX 4Q23, Volume Up, ‘Running Well’ (Updated, Joe Hinrichs Interview and TD Cowen Insight)

Written by Marybeth Luczak, Executive Editor
(CSX Photograph)

(CSX Photograph)

CSX issued its fourth-quarter 2023 earnings after Wall Street’s closing bell on Jan. 24, reporting lower revenue as the effects of volume growth and “favorable merchandise pricing were more than offset by lower intermodal storage revenue, reduced fuel surcharge, the effect of lower global benchmark coal prices, and a decline in trucking revenue.”

Revenue came in at $3.68 billion for the three months ending Dec. 31, 2023, declining 1% from the prior-year period’s $3.73 billion. Total volume of 1.56 million units was 1% higher than 2022, with Merchandise volume up 3%, Coal volume up 3%, and Intermodal volume flat.

Other fourth-quarter 2023 financial highlights:

  • Operating income of $1.32 billion was down 10% from the fourth-quarter 2022’s $1.46 billion.
  • CSX’s operating ratio came in at 64.1% vs. 60.9% in the prior-year period.
  • Diluted EPS of $0.45 decreased 8% from $0.49 in fourth-quarter 2022.
  • Net earnings of $886 million (or $0.45 per diluted share) were down 13% compared with $1.02 billion (or $0.49 per diluted share) in 2022.

For full-year 2023, CSX revenue totaled $14.66 billion, decreasing 1% year-over-year “as the impacts of a decline in intermodal storage revenue, reduced fuel surcharge, lower global benchmark coal prices, and a decrease in intermodal volume more than offset contributions from stronger merchandise pricing and higher merchandise and coal volume,” the Class I reported.

Total volume of 6.14 million units for the year was 1% lower than 2022, with Merchandise volume up 2%, Coal volume up 8%, and Intermodal volume down 7%.

Other full-year 2023 financial highlights:

  • Operating income of $5.56 billion in 2023 dropped 8% from $6.02 billion in 2022, “with last year’s results inclusive of gains of $144 million from the property sale agreement with the Commonwealth of Virginia [for the Transforming Rail in Virginia Initiative],” according to CSX.
  • CSX’s operating ratio came in at 62.1% for 2023; it was 59.5 for 2022.
  • Diluted EPS of $1.85 decreased 5% in 2023 from $1.95 in the previous year.
  • Net earnings for 2023 came in at $3.72 billion (or $1.85 per share), down 11% from $4.17 billion (or $1.95 per share) in 2022.

2024 Outlook

CSX reported that it expects low to mid single-digit total volume and revenue growth, with “[s]olid momentum across Merchandise, Intermodal, and Export Coal.” It also said that profitability is “supported by solid pricing, improving efficiency, and lower cost inflation.” Capex for 2024 will be approximately $2.5 billion, which includes “[s]afety investments, capacity/equipment additions, technology enhancements, MNBR interchange, [and] high-return growth projects.” The Class I noted there would be a “[b]alanced approach to capital returns.”

CSX said total Merchandise volume growth would be “supported by service leadership, recent business wins, and modal share gains,” with “[p]romising trends emerging in Chemicals, Forest Products, and Fertilizers markets.” It noted that new industrial development projects will be contributing approximately 1% to Merchandise volume in 2024. There will be a “[s]upportive pricing environment” reflecting “strong service performance,” the railroad added.

For Coal, CSX expects “robust” export demand, with volumes supported by unit train performance and new mine ramp-up. “Current spot global met coal benchmarks remain elevated,” and “[e]xport thermal prices have softened but remain higher vs. pre-pandemic levels,” the railroad noted. “Domestic coal demand [will be] modestly impacted by more normalized utility stockpiles [and] lower natural gas prices.”

For Intemodal, there will be “[c]ontinued momentum for domestic volumes,” according to CSX, which said it anticipated “solid growth led by strong channel partner relationships, direct partnerships [and] truck conversion.” International volume growth will be “turning positive,” with “[n]ormalizing inventories, better import levels and inland port activity supportive of demand,” the railroad reported. Network performance will remain “flexible and resilient through dynamic weather and uncertain geopolitical events.”

CSX President and CEO Joe Hinrichs

“Throughout 2023, our railroad demonstrated reliable, industry-leading network performance, and the ONE CSX team delivered consistent results through a dynamic economic environment by focusing on excellent customer service,” CSX President and CEO Joe Hinrichs said. “Our railroad is running well, we have the right team and resources in place, and we look forward to building on our positive momentum with profitable growth over this next year.”

Joe Hinrichs: “We Feel Good About Our Momentum”

Railway Age Editor-in-Chief William C. Vantuono spoke with Joe Hinrichs early on Jan. 25:

RAILWAY AGE: The consensus is that things really started to pick up for CSX in the fourth quarter. We see momentum going into the year. What do you think is going to drive that?
HINRICHS: We see momentum in several areas. We had our best safety quarter, which is good, given all the focus on that with [Executive Vice President and Chief Operating Officer] Mike Corey coming in and the team coming together—a new set of eyes and experience energizing the team to look for more opportunities. Importantly, we also saw a couple of key customer segments that had been negative all year start to inflect positive—forest products, international intermodal, chemicals. Every month they were down year over year and then in December we saw that go positive. We feel good about our momentum. Operationally, the railroad is now very close the manpower levels we have been looking to get to. We’re now feeling good about our staffing levels for the first time in four years. The network is in good shape. Fluidity is good and demand is strong. It’s not gangbusters but it’s growing, getting better and better. That’s all encouraging as we came into this year in a good place. December weather was very mild, and our network was in great shape the first week of January. And then the Arctic blast came in and slowed things down a little bit for the whole industry and economy, but the past couple of days our network is running well again. and so we’re starting to see that. We’re very optimistic about the momentum we have coming into the year operationally and from the demand side.

RAILWAY AGE: CSX is the best performing of the six Class I’s. Do you see that continuing at least for the foreseeable future?
HINRICHS: We do, based on all the things we just talked about, where our network is in good shape and our team is really focused on serving the customer. On-time originations, on-time arrivals, trip plan compliance, first-mile/last-mile—our team is focused. Our operating team is coming together nicely with our sales and marketing team to work together to serve customers, talk to them, find out what’s important to them. Now, our manpower levels are not perfect. There are still a few locations where we’re short a few people. But in general, we feel good about our staffing and the culture that we’re building, the ONE CSX culture. How we treat each other, how we work together, how we serve the customer and how we focus on safety for our employees is really starting to come to life. All those things are coming together to give us confidence that we can continue to run well. And we expect other railroads to continue to improve and they will, which is good for them. But we want to continue to lead in service and we want to get back to leading in safety. BNSF had a good year in safety; we were number two. We want to get back to being a leader in safety as well as service.

RAILWAY AGE: There are some interesting developments that that got their start last year: the partnership with CPKC on hydrogen locomotives, for example. CPKC now has a hydrogen fuel tender built by HGmotive.
HINRICHS: That’s progressing. You’ll see more about that this year. We’re very excited about that joint venture, about the work we’re doing with testing and developing hydrogen locomotives with CPKC. We also have the new interchange point with CPKC at Myrtlewood, Ala., which is the first new interchange point in decades. We should go live this year with that. You’ll see a lot more of the benefits of our Pan Am acquisition this year because we’re starting to get that network up to speed and have the safety capabilities we’re looking for. Several exciting things are going to play out this year that have been in the works for a while.

RAILWAY AGE: What does capital program look like for this year?
HINRICHS: It’s going to be $2.5 billion, up from 2.3 billion last year—spending on the new interchange, on locomotive rebuilds including the hydrogen locomotives, continued investment in Pan Am and other safety elements, and on technology. So, we’re taking it up a little bit, but we feel good about where we are and the state of our network and want to maintain that. I have to tell you; it has been fun being a railroader because of the impact we have on the economy and the difference we can make. You now have people talking about stakeholders again—not just with CSX of course—and our CSX team is showing you can provide excellent service for your customers and have a profitable railroad. Then we can get to talking about growth, which is what everybody wants to talk about. But we can’t grow without giving better service. That’s what the customers, I believe, feel strongly about. We’re working on it every day.

More financial and operational performance information is available on CSX’s Investor Relations page.

TD Cowen Insight: “Sticking to What Works”

By Jason Seidl, Wall Street Contributing Editor

Jason Seidl

CSX came in above our forecast and consensus expectation to finish what proved to be a challenging year for the Class I rail network. Guidance calls for low-to-mid single-digit volume and revenue growth in 2024; uncertain margin outlook may reinforce views on cost stickiness within the rail network. CSX is a high-quality company with solid fundamentals that appears well positioned to benefit from long-term economic growth. However, we would remain on the sidelines due to less-than-compelling valuation. The shares may become attractive to patient, long-term investors. Our price target moves to $36 as we roll our model forward, and reiterate Market Perform.

CSX reported 4Q23 EPS of $0.45, above our $0.41 estimate and the consensus forecast of $0.44. Adjusted OR of 64.1% was in line with our forecast, worsening 320bps y/y. Consolidated revenues declined 1% driven primarily by softer yields, reduced fuel surcharge and weakness in trucking revenue.

Intermodal revenues declined 4% with flat volumes in the fourth quarter. Full-year intermodal volumes declined 11% for intermodal as a severely pressured OTR market weighed on IMC conversion. While we continue to see the IMC market challenged in 1H24 at a minimum, we were encouraged to see CSX grow volumes and revenue per carload sequentially in the fourth quarter. Management expects growth and momentum into 2024 (off soft comps) in both its domestic and international markets. CSX saw international volumes increase each month through 4Q23 as inventories normalize. Additionally, there has been no visible changes to customer behavior from either the Panama Canal or the Red Sea.

Coal volumes grew 3% in the fourth quarter as export demand remained strong, though lower natural gas prices lowered restocking and weighed on domestic demand (export tonnage grew 27% and domestic declined 13%). Looking forward, CSX expects continued strength in the export coal market with domestic demand largely dependent on weather conditions in 2024; we are currently modeling 4% volume growth off 8% growth in 2023.

CSX expects to grow operating income sequentially in the first quarter, while highlighting some moving pieces to the cost picture, which include a step up in PSO costs and a slight moderating in labor and fringe. We expect model operating costs to prove slightly stickier and modestly increase (or worsen) our OR assumptions in 2024, which understandably can quickly swing with fuel impacts. In 2023 CSX saw OR increase by ~260bps to 61.7%, and note that the company hadn’t reported an OR with a six handle on a full-year basis since 2018.

CSX provided financial guidance that called for low-to-mid single digit volume growth for 2024, with momentum across merchandise, intermodal and export coal. CSX expects solid pricing and improved efficiency, though guidance suggests ~flat pricing (with difficult comps in the first quarter).

We increase our 2024 EPS estimate to $2.00 from $1.95 primarily from increased volume expectations partially offset by slightly lower margin expectations. We introduce our 2025 EPS estimate of $2.20 and continuing to our 16.5x multiple, our price target moves to $36. We reiterate Market Perform.

In a related development, Loop Capital Markets recently named CSX recipient of its inaugural W.F. Thompson Award for Class I Operating Performance for 2023, “highlighting CSX’s success in driving its growth strategy by leveraging strong operational execution.” The award recognizes the Class I railroad with the best operational performance in a calendar year, in Loop Capital’s estimation.

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