CSX expects service gains will bolster railroad during economic downturn

Despite macroeconomic headwinds serving as a backdrop for 2023, Eastern U.S. railroad CSX sees its improving service metrics as an opportunity to garner new business and expand network capacity.

The service improvements are “a real change, and there’s a lot of excitement around this organization about it and what we can do going forward,” Kevin Boone, executive vice president for sales and marketing, told investors during CSX’s fourth-quarter 2022 earnings call Wednesday afternoon.

Improving service metrics, which are trending toward pre-pandemic levels, have enabled CSX to have more fruitful discussions with customers about meeting their needs, executives reiterated several times throughout the call.

“We’re very confident about the things we can control in our business: our operating performance, our capacity now with our manpower, the team we have, the skills and the capabilities we have,” said CSX President and CEO Joe Hinrichs. “There’s a little uncertainty about the health of the economy this year, so we watch that very carefully. But we feel really good about how we come into 2023 — how we’re performing so far in 2023 and the feedback we’re getting from our customers. And so, we’ll leverage that to show that we can deliver growth and that we can build an even stronger business.”

CSX expects to achieve overall volume growth in 2023, although it didn’t offer a percentage range. The railroad expects volume growth to outpace real GDP growth of 0.5% for the year.

Despite the macroeconomic uncertainties, CSX sees “solid volume growth” in merchandise amid continued strength in automotive and export plastics, as well as “share gains as customers respond to our improving service,” said Kevin Boone, CSX executive vice president for marketing and sales. Meanwhile, weaker housing-related and domestic chemical shipments could offset gains, he said.

Export coal volumes are also expected to grow, while international intermodal markets are likely to be soft into the first half of 2023 on slowing import activity and elevated inventory levels, Boone said.

And even though the trucking market has softened, CSX is “focused on accelerating truck-to-rail conversions,” according to Boone, now that the railroad has moved on from equipment constraints.

Hinrichs said, “The conversion opportunity is to demonstrate some repeatability and predictability around our performance and to show our customers that we now have the capacity in place and we have the performance to demonstrate that you should come back to us.

“In the conversations we’re having with customers, they’re recognizing the improvements that we’ve shown for the last several months. And they’re also confident in our ability to continue that, especially now that we have the manpower levels where we want them to be.”

Although increased costs could come from elevated inflation and higher headcount numbers, improved network fluidity should reduce terminal costs and overtime pay, according CSX CFO Sean Pelkey. Other cost reductions could come from reducing crew travel and ancillary costs.

CSX’s capital expenditures budget for 2023 is approximately $2.3 billion.

CSX will also continue to hire for crews for key locations and to offset attrition, although the company sees headcount for train and engine employees stabilizing this year, according to Jamie Boychuk, CSX executive vice president of operations.

“It’s probably one of the first times in a couple of years … [that] I can say we’re comfortable that our headcount is at a good spot and continuing to move into a good spot as we move into the year,” Boychuk said.

4th-quarter financial results

Net profit for CSX (NASDAQ: CSX) in the fourth quarter of 2022 was $1 billion, or 49 cents per diluted share, a 9% increase from $934 million, or 42 cents per diluted share, in the fourth quarter of 2021.

Revenue grew 9% year over year to $3.73 billion, supported by higher fuel surcharges, pricing gains and an increase in storage and other revenues, CSX said, while severe winter weather in late December put pressure on revenues and volumes.

Fourth-quarter expenses rose 10% to $2.27 billion amid a 46% increase in fuel costs, which were $411 million for the quarter. Operating income rose 7% to $1.46 billion.