CSX’s Hinrichs: ‘Ready to Meet Our Customers’ Needs’ (UPDATED 10/17, TD Cowen Insight, PLUS Interview With Joe Hinrichs on 3Q24, Weather Impacts, Labor)

“Over the past several weeks CSX, along with many of the communities in which we operate, was presented with significant challenges brought about by the recent hurricanes,” Hinrichs continued in comments released by CSX on Oct. 16. “Thanks to the dedication of our employees, our network has remained flexible and resilient, and we remain ready to meet our customers’ needs as they increasingly favor the efficiency and reliability being delivered by the ONE CSX team.”

Following are CSX’s third-quarter 2024 financial highlights:

• Revenue came in at $3.62 billion for the quarter, a 1% gain year-over-year, “as growth in merchandise and intermodal volume, as well as merchandise pricing gains, were partially offset by a decline in coal revenue (including the effects of lower global benchmark prices), lower fuel surcharge, and a reduction in other revenue,” according to the railroad (see below).

• Operating income of $1.35 billion was up 7% from third-quarter 2023’s $1.27 billion.
  
• CSX reported that its operating margin was 37.4% for the quarter, increasing 180 basis points year-over-year.

• Net earnings were $894 million, or $0.46 per diluted share, compared with $828 million, or $0.41 per diluted share, in the same period last year.

• Total volume of 1.59 million units for the quarter was 3% higher than third-quarter 2023.

On the operations side for third-quarter 2024, CSX said velocity trended “favorably” compared with last year, “reflecting purposeful changes” including improved track maintenance efficiency and “effective, continuous train plan reviews.” CSX noted the “temporary challenges” it experienced from weather events (see below for service metrics affected by weather).

“Our railroad remains fluid, albeit we have had and still have some weather-related challenges,” said Mike Cory, CSX Executive Vice President and Chief Operating Officer during an Oct. 16 earnings call. “Our overall velocity considering the effects of the weather showed the resiliency of our network. Our ability to maintain our fluidity came directly from the effective response of our field forces and our ops teams and manage changes to our service plan to provide needed service to our customers in an efficient manner throughout this period. Collectively, we’re able to ensure our strategy of safe restoration of service was accomplished without injury or accident. And while network speed is extremely important, our focus has been equally strong, ensuring our major engineering work gets accomplished according to the plan. With multiple weather constraints, we were able to stay on plan while maintaining our network velocity. While our dwell metric was affected by weather, we did see an increase of 3% more carloads and moved it with 2% less train starts. So, we continue to manage the inventories in our yards for our customers and always, always look for a more efficient way to move the cars. Weather aside, the team is focused on service and efficiency, and the lessons learned from our response and actions as a team will certainly help in the development of our operating leaders going forward.”

2024 Outlook

CSX provided a 2024 guidance update. While the railroad said it delivered “meaningful” growth and margin expansion in the third quarter, “external factors” will make the fourth quarter “more challenging.” Fourth-quarter volume is expected to grow “modestly,” according to the railroad, “with continued strength in Chemicals, Ag & Food, and other Merchandise markets offset by softer-than-expected Metals and Automotive conditions, along with continuing effects from the recent hurricanes.”

Sean Pelkey, CSX Executive Vice President and Chief Financial Officer, addressed the impact of storm recovery work going forward during the Oct. 16 earnings call. “From a business standpoint, [Hurricane] Helene impacted revenue by $10 million to $15 million at the end of the third quarter and drove a small amount of incremental expense,” he reported. “It appears the fourth quarter storm-related impacts will be larger than the third quarter and with a current estimate of around $50 million. That includes storm recovery and rerouting costs near $20 million as well as roughly $30 million of net revenue impacts. Additionally, a significant rebuild process is already under way for miles of track and multiple bridges across our Blue Ridge subdivision. While we’re still evaluating the scale and timing of these capital expenditures, our early read is that rebuild costs will likely exceed a total of $200 million, and the construction will take us into next year.”

Joe Hinrichs, during the call, categorized the near-term conditions going into the fourth quarter as “modestly more challenging.”

“As I mentioned at an investor conference last month, we knew that lowered diesel prices and the decline in global benchmarks for met coal will be a drag on revenue over the second half and the fourth quarter specifically,” Hinrichs noted. “Since then, we’ve gone through two hurricanes in our service region, and have also seen volumes softened in a couple of key customer segments like Metals and Automotive, a bit more than we were expecting. Practically, this means that we expect modest volume growth in the fourth quarter supported by favorable markets like Chemicals and Ag … that continue to perform very well for us. Lower fuel and coal prices, together with that modest volume growth are leading us to expect a slight decrease in total revenue for the fourth quarter. … [W]e estimate that lower fuel surcharge and the total effects of a slightly softer coal market will lead to roughly $200 million in revenue effects year-over-year just on their own.

“Our Merchandise franchise continues to run very well, and our Operations team is pushing ahead with efficiency measures that are having real benefits. However, slightly lower revenue combined with additional expenses as we reroute and rebuild after the hurricanes are going to limit our near-term margin gains. We are still aiming for $2.5 billion in total capex this year. As Sean [Pelkey] described, we will likely see some additional capital needs for hurricane rebuilding, some of which will occur in 2024 calendar year. Finally, there is no change to our commitment to a balanced opportunistic approach to capital returns via buybacks and a growing dividend.

“Let me close with this. We give many updates today. There is some near-term uncertainty in the market, and we are rebuilding after two major hurricanes. So we have had to adjust our short-term assumptions in response. All that said, the bottom line is that CSX is running very well, and we are building momentum across the railroad. This continues across the second half of 2024, and we’ll keep building into 2025.”

The TD Cowen Insight: ‘Lowering Q4 Expectations as Weather Challenges Network Over Medium-Term’

“CSX missed our forecast and Consensus in Q3 and lowered Q4 expectations,” reports TD Cowen’s Managing Director, Industrials and Railway Age Contributing Editor Jason Seidl, along with analysts Elliot Alper and Uday Khanapurkar. “CSX still expects to grow volumes in Q4 after difficult start to the quarter. Costs from storm impact will likely limit growth over medium-term as a significant rebuild takes shape. We lower our price target to $35, reiterate Hold.”

Key Cowen Takeaways:

“CSX reported 3Q EPS of $0.46 coming in below the Street forecast of $0.49. Consolidated revenues +1.3% y/y came in slightly below our estimate on volumes roughly in line as yields missed our forecast. The main reason for the lower than anticipated EPS was that the railroad OR of 62.6% missed our estimate by 80bps.

“Intermodal volumes grew by 3% in 3Q though was partially offset by rev/car declining 4.5% y/y, and stepping down sequentially for the third quarter in a row. International shipments grew mid-single digits while domestic shipments were flat; management did call out a shift towards the West Coast in the quarter which lifted the transcon interchange though not material to the overall business. We model ~flat IM RPU sequentially as CSX pointed to J.B. Hunt’s commentary that pricing has likely bottomed out (though will limit pricing upside until 2H25 at the earliest). IM volumes are down 11% through the first two weeks of the quarter due to weather impacts, and we will continue to monitor weekly carloadings to see the pace of recovery in the network.

“Coal RPU -5.4% y/y came in modestly softer than our cautious estimates and management guided to further weakness in 4Q with another LSD sequential decline. Soft industrial activity combined with low natural gas prices continues to pressure domestic volumes (tonnage -12% y/y) and yields. With the industrial economy outlook generally soft, we expect these headwinds to persist. While export coal tonnage +10% remains healthy, CSX pointed to cracks in met coal pricing.

“Merchandise volumes +3% y/y saw growth accelerate over 2Q in line with normal peak patterns and continued strength is expected in 4Q on strong Ag and Chemical volumes driven by new business wins, which management attributed to an improved service proposition. CSX pointed to increased OTR conversions in merchandise, a theme also touched on by J.B. Hunt yesterday [Oct. 15]. Conversions could accelerate as the TL market recovers although we remind investors that our channel checks indicate it could be 2H25 before we see one. CSX called out autos and metals as pockets of weakness.

“CSX lowered its Q4 expectations driven primarily due to weather-driven events in the quarter, which management said was second worse only to Hurricane Katrina. Current expectations of storm-related impacts are $50MM in Q4 ($20MM of re-routing costs and $30MM net revenue impacts). While CSX still expects to grow volume in Q4 (strength in Chem/Ag/Merchandise offset by Metals/Auto), revenues and margins will now likely step down in Q4, after previous guidance called for improvement in 2H. Q4 OR is expected to be below seasonality, and we model OR worsening 170bps sequentially. CSX will likely incur medium-term costs into 2025 as a significant rebuild takes shape, and we lower our out-year estimates.”

Railway Age Q&A With Joe Hinrichs, Oct. 17

Railway Age spoke with CSX President and CEO Joe Hinrichs on Oct. 17, one day after the Class I’s earnings call. Following is the Q&A, lightly edited for clarity.

Railway Age: CSX and other carriers have been impacted by Hurricane Helene and most recently Hurricane Milton. Where do you stand today with your recovery efforts? How are your employees?

Joe Hinrichs: When it comes to eastern Tennessee, our Blue Ridge Subdivision right now has about several, many miles of track that are washed out and two bridges. So we said in the call yesterday [Oct. 16] that early estimates are $200 million or so in capital to rebuild that subdivision. That’s going to take us into next year, of course, but so we’re rerouting our customer traffic around that, filtering our customers and rerouting. When it comes to [Hurricane] Milton, we have one small section left in Florida to get back running, but we will have that done either today or tomorrow, and we’re servicing all customers; small bridges got washed out. So Florida’s in pretty good shape. The rest of our network in the Southeast United States is good, except for that Blue Ridge Subdivision, which is going to take us time to rebuild. Thankfully, we had no injuries, or certainly no lost life within our CSX system. There have been lost lives in the communities where our people live, so our prayers are for those families. We had a number of employees who lost their power, who lost their homes. So we’ve been reaching out to them. We reached out to all our employees and offered a lot of help.

Railway Age: What do you expect the impact to be on your fourth-quarter results?

Joe Hinrichs: We said last night on the earnings call that the revenue and ongoing cost impact on the fourth quarter is about $50 million of operating income, and the fact that we had about $15 million in the third quarter, and then we said at least $200 million of capital to rebuild the Blue Ridge Subdivision. So obviously, we have work ahead of us. Our teams are excited about getting things rebuilt and continuing to serve our customers.

Railway Age: During the second quarter of 2024, the bright spot for CSX was Merchandise. What bright spots could you point to for the third quarter?

Joe Hinrichs: Merchandise was again a big strength in our network. Very strong performance. Chemicals, Ag, like Grain. Also, we saw some growth in Forest Products and Minerals. Really Chemicals and Ag were the two big drivers. We had 3% volume growth in Merchandise, 6% revenue growth in Merchandise; so pretty substantial. And interestingly, as Sean [Pelkey] mentioned last night on our call if you take out fuel fuels, combined Merchandise and Intermodal revenue has grown by 3% or more for seven consecutive quarters, [including 5% growth in the most recent quarter]. Industrial markets are pretty flat. So a lot is being driven by Merchandise, which is very strong, Chemicals. Now, where the we saw a decline a little bit was within the Metals, Steel, but also in Automotive. So that’s one to watch, but very strong performance in Chemicals, Ag.

Railway Age: You have taken your railroad’s labor negotiations out of national handling, and, well ahead of Nov. 1 Section 6 notices, entered into some tentative and some ratified agreements with your unions. Opinions in the industry vary on this move, as Railway Age Editor-in-Chief William C. Vantuono points out in a recent commentary. Obviously, you and your team thought through the complexities. What is your outlook on this?

Joe Hinrichs: First of all, for many people change is uncomfortable. We have to recognize that if we keep doing things the same we’ve always done, that we’re going to get the same results, and the results haven’t been satisfactory to anybody. You think about the last round of negotiations, everyone was dissatisfied—from from the union employees, the union officials, the government officials, regulators, to our customers, our employees. So we sat down and talked about that, about how can it be different. And all the railroads are in different places, with their different agreements, different unions. And the complexity of this ecosystem, with however you want to count them, 11, 12, 13 different unions, is very complicated. And each railroad is a different place. What we [at CSX] need to work on is different than what BNSF needs to work on, and so on and so forth. So we did try as an industry coalition to come together and reach voluntary agreement with one union. We started with TCU, but we weren’t able to get there as a coalition together voluntarily. So we [CSX] moved forward with TCU. You saw the other unions come over as well. I think that’s an indication of the union leaders, union employees and the companies, many of them, want to move forward with a different kind of relationship than we’ve had in the past. We serve our customers, and to serve our employees, it’s in our best interest to have a much more collaborative working relationship with our unions—work together on safety, work together on better customer service, work together on growth initiatives, work together on efficiency, work together on what’s important to our employees like scheduling work life balance. If we’re spending three years fighting over what the wage increases are, or the single-person crew mandate, we don’t get time to spend on those other things that are important. Our view is let’s get the national contract issues out of the way so we can spend the next several years working together on those things that are important.

Railway Age: Are you concerned about creating multiple and differently timed threats of work stoppages?

Joe Hinrichs: I understand the issue. Frankly, because of the network and the ecosystem that we have, it would be almost impossible for one railroad to not be running and the other ones to run. So the solution to that is let’s all work together to both unions and companies to resolve our issues and find solutions behalf of our employees and on behalf of our shareholders.

Railway Age: How will national handling proceed now with some tentative and some ratified agreements in place?

Joe Hinrichs: That’s a good question. That’s something that we’re all working on. There are different, without getting into the details, there are all kinds of different scenarios that can play out. We could do national handling with a few, a small number of unions that haven’t reached agreements. We could wait. You don’t have to do it on Nov. 1. You don’t have to serve Section 6 notices on Nov. 1. The different ways to play out, we’re still talking about it. But there are different options. Now that there’s been a basic pattern set, because Norfolk Southern and BNSF and ourselves have reached many agreements, there should be a way to move forward with the other unions as well.