CSX 3Q21: Revenue, Volume, Hiring Up (Updated, Cowen, Blaze, STB)

CSX on Oct. 20 reported third-quarter 2021 revenue of $3.29 billion, a 24% boost from the prior-year period, with a 3% increase in volume.

The Class I railroad said that revenue was “driven by growth across all business lines, increases in other revenue and the inclusion of Quality Carriers’ results.”

Net earnings for the three months ending Sept. 30, 2021, came in at $928 million (or $0.43 per share), up 32% from the same point in 2020 ($736 million, or $0.32 per share). Operating income improved 26% to $1.44 billion. According to the earnings report, the 56.4% operating ratio was a 50 basis point improvement from 56.9% in third-quarter 2020. 

To address supply chain challenges, CSX said it has 13 overflow container yards at key terminals throughout the network; a partnership with Georgia Port Authority to use inland rail yards, freeing up truck capacity and reducing port terminal congestion; and Port-to-Port East Coast lanes to alleviate marine terminal congestion and provide a rail solution for diverted vessels (see chart above).

In addition, the Class I railroad is creating capacity through operating initiatives. It reported increasing the T&E workforce and boosting the hiring pipeline by more than 300% since July; implementing new incentive programs to increase existing employee availability; adding supplemental labor at intermodal terminals to maintain fluidity; and upgrading and automating equipment at key yards to improve fluidity and throughput (see chart above).

Looking ahead, CSX said it is maintaining its prior outlook for “double-digit revenue growth before the impact of the Quality Carriers acquisition,” and is expecting “capital expenditures at the top end of the $1.7 billion to $1.8 billion range.”

“I want to thank all of CSX’s railroaders for their continued dedication to our customers amidst the combination of ongoing supply chain disruptions and challenges presented by the COVID-19 Delta variant this quarter,” President and CEO James M. Foote, said. “We are committed to helping our customers overcome current supply chain constraints and will continue to take action in order to keep our network fluid and design new solutions that enable the delivery of critical goods to millions of Americans.”

The CSX Investor Page provides more details on third-quarter financial results.

Cowen Insight: ‘CSX Rolling On’

“CSX reported a record-setting OR in 3Q, leading to a beat on the bottom line vs. our estimate and the consensus forecast,” reported Cowen and Company analysts Jason H. Seidl (Managing Director and Railway Age Wall Street Contributing Editor), Matt Elkott and Elliot Alper. “Full-year outlook remains intact (vs. both CP [Canadian Pacific] and KSU [Kansas City Southern], which retracted/revised guidance) despite a continued challenging carload market. Reiterate Market Perform.”

Key Cowen Takeaways:

• “Adjusted EPS of $0.43 was above our and the consensus estimate of $0.38, driven by a record-setting OR (easily exceeding our estimate) of 56.4%. Revenues improved despite a challenged carload market. Autos revenue was hit the hardest (down 23%) due to the decline in North American vehicle production due to the well-publicized chip shortage, while coal increased 39% in the quarter as strong shipments and pricing played out, which we expect to continue.

• “The number of employees stepped up slightly sequentially in the quarter, with a strong hiring pipeline (+300% since July), as the company implemented incentive programs and increased flexibility to combat the very tough labor market. We expect headcount to continue to grow sequentially, likely at a smaller clip, as CSX works to increase capacity and continue to improve reliability. Intermodal on-time trip plan performance was 88% in the quarter, and carload on-time trip plan performance was 68% in the quarter.

• “On the pricing front, management stated that the fourth and first quarter are heavy renewal periods (didn’t break out further) and that they have been very transparent on inflation and cost pressures with their customers when drawing up pricing.

• “CSX maintained their full-year guidance of double-digit revenue growth before the impact of Quality Carriers, with capex now expected to be on the high range of its $1.7 billion-$1.8 billion guidance. We were encouraged to see CSX maintain its full-year outlook (although broad) after seeing both CP and KSU revise/retract guidance given so much uncertainty in the supply chain. An impressive OR in the third quarter demonstrated the adaptability of CSX’s model and came in above all of the other Class I’s that have reported so far in the third quarter. Free cash flow in the quarter was $2,896 million, with $1,064 million in buybacks and $208 million in dividends.

• “We increase our 2021 and 2022 EPS estimates to $1.57 from $1.50, and $1.80 from $1.75, respectively. Continuing to use our 19.5x multiple and our new 2022 EPS forecast, our price target goes to $35 from $34. Reiterate Market Perform. That said, we were encouraged by management commentary that they are starting to hear talk of customers looking to near-shore more of their supply chain due to the recent disruptions with goods from Asia. This could potentially lead to more opportunities for CSX and other US-based transport companies.”

Jim Blaze: Contrarian Perspective

Railroad economist and Railway Age Contributing Editor Jim Blaze has a very different (and rather harsh) take on CSX’s metrics. “There is no resilience from CSX’s PSR business model on carload trip performance,” he said, citing its 68% on-time number. “Best-of-class performance should be in the 90% to possibly 94% range. Performance on intermodal? Likewise relatively poor at below 90%.  Benchmark best performance for intermodal should be in the 98% range. That’s hard to do when CSX PSR operations often mix intermodal into merchandise trains to keep their train start cost down and the OR looking great at below 58. Average train velocity of 17.7 mph? Really? The term ‘PSR’ has become a very bad joke. As a railroader, it is embarrassing to hear it. With a high school report card like this, my dad and I would have had a serious talk out by the woodshed years ago. Wall Street? Ignores it. No cheers!”

STB Wants Answers

On Oct. 18, STB Chairman Martin Oberman sent a letter to Jim Foote citing “a steady stream of complaints” from customers made to the STB. Following is the letter’s full text:

“I am writing to request that you provide an update on the rail service performance of CSX Transportation, Inc. in meeting the needs of its customers.

“The reason for my request is that over the past several months the Board has continued to receive a steady stream of complaints about the adequacy of rail service provided by CSX. In both private meetings and public settings, CSX customers have relayed examples of substandard performance, including missed switches, extended transit times for both manifest and bulk shipments, unfilled car orders, and the inability to contact customer service and operating personnel. These complaints are not limited to any particular region on CSX’s network, nor are they confined to shippers of specific commodity groups. Customers have also reported that service problems are sometimes resolved, only to reoccur weeks or months later. Taken together, these complaints are of grave concern as it appears that CSX resources are surged to assist one customer, only to have problems arise with another. And, as a result of these problems, customers incur premium freight costs, idled production, lost sales and damaged commercial relationships, typically without meaningful recourse from CSX.

“In addition to anecdotal incidents, CSX’s rail service performance data reported under STB Docket No. EP 724 tends to support that CSX’s network is underperforming compared to the benchmarks set in 2019. (Because of disruptions caused by COVID-19, I do not believe that 2020 is a reliable baseline.) For example, during much of 2021, system average train speed is down 6%; average terminal dwell is up 16%; and average loaded cars not moving in 48 hours is up 98% against 2019 numbers. Yet CSX’s average weekly carloadings (originated and received in interchange) are comparable for 2019 and 2021. I also note that CSX has approximately 1,000 fewer “transportation” employees for August 2021 compared to August 2019 (6,577 vs. 7,543), as reported on STB Form C.

“While CSX is responsive and prompt to address discrete rail service issues, these reports have been repeated over a long period of time with only periodic and temporary improvement, and I am concerned about what appears to be a systemic problem within CSX’s operations.

“I look forward to receiving your perspective on the current state of CSX’s network, and specific details of how CSX plans to meet the needs of its customers. In particular, I would appreciate your evaluation of CSX’s performance metrics from 2021 vs. 2019 and what factors are hindering CSX’s ability to attain past levels of fluidity and service, including the impact of headcount reductions for train, yard and maintenance employees.”

CSX Speaks Out

CSX provided Railway Age with the statement below in response to the STB letter:

“We look forward to providing a fulsome response to Chairman Oberman’s letter.

“CSX is committed to providing reliable and efficient service to our customers and we take any complaints very seriously and do everything we can to address them when they are brought to our attention.

“It is difficult to identify the anecdotal issues that are raised in the Chairman’s letter as we currently do not have any formal complaints pending before the STB and have not experienced an increase in informal service complaints.

“We are proud of what we have been able to do in the face of the significant challenges that our industry has faced since the onset of the pandemic. No one in the industry is doing more to overcome these challenges. Through incentive programs and expanded training capacity, we have already hired more conductors in 2021 than in 2019 and 2020 combined. We also have the highest velocity in the East and lowest dwell in the U.S.

“We know that there is more work to do to get our performance levels back to the record levels we delivered in 2019, and we’re confident that we can build upon our industry leading position to get back to those levels.”