CSX Corporation (NYSE: CSX) has lowered its revenue outlook for 2019 by 1 to 2 percent in response to a “puzzling” economic backdrop, and it plans to monitor its costs for the remainder of the year, company officials said on July 16.
The lowered revenue outlook is in response to several factors, including cheap natural gas prices, which are denting domestic coal demand, slower intermodal volumes and residual impacts on crude-by-rail volumes as a result of a refinery explosion in Philadelphia in June.
Just as its peer Canadian Pacific (NYSE: CP) said during its second quarter earnings call earlier on July 16, CSX also plans to cut costs as a way to weather any economic headwinds and maintain an operating ratio of under 60 percent.
“Both global and U.S. economic conditions had been unusual this year to say the least and have impacted our volumes. You see it every week in our reported carloads,” said James M. Foote, CSX chief executive officer, during his company’s second quarter earnings call on July 16. “The present economic backdrop is one of the most puzzling I have experienced in my career. We are not necessarily being pessimistic about the second half of the year. But in these launches we need to adjust guidance, we’re just setting out the obvious. This outlook is based on a current business levels and there is an upside to this forecast as conditions improve in the second half,” Foote said.
He continued, “We are seeing a range of conflicting data points and economic indicators and regularly speak with customers who despite the recent downtime – slowdown, remain cautiously optimistic about the second half.”
Today’s macroeconomic factors
In the second half of the year, CSX could undertake a number of initiatives aimed at reducing costs, such as continuing with its plans to consolidate trains by expanding the use of distributed power on its trains while also having longer crew runs. These measures will ultimately help reduce labor and overhead costs, CSX officials said.
“If we saw a significant decline in our business levels, we would respond quickly and aggressively and do everything we could to try and maintain our cost structure and advantage,” said Mark Wallace, CSX’s executive vice president for sales and marketing.
While lowered projections for the U.S. gross domestic product in the third and fourth quarters are weighing on volume expectations for carloads, CSX’s intermodal sector is feeling the pressure of a weaker truck market and excess truck capacity.
Uncertainty over U.S.-China trade is also weighing on rail volume activity.
“Obviously, what would help in the back half would be a resolution or clarity on trade tariffs…but that is obviously beyond our control. But what is within our control is providing a high-quality service product to our customers and covering new opportunities to use those service products for both new and existing customers and to make sure that we are extracting a fair value for the service we provide,” Wallace said.
Despite revenue falling in the second quarter, CSX’s operating ratio set a company record.
CSX said its operating ratio was 57.4 percent for the second quarter of 2019, setting a company record for the lowest second quarter operating ratio. In contrast, operating ratio for the second quarter of 2018 was 58.6 percent. Operating ratio, which can be a factor in determining a railroad’s profitability, is a ratio that looks at a company’s operating expenses as a percentage of its revenue.
While the railroad’s operating ratio improved, its quarterly profit fell. CSX’s second quarter profit was $870 million, or $1.08 per share, compared with $877 million, or $1.01 per share in the second quarter of 2018.
Second quarter revenue fell by 1 percent to $3.06 billion, with growth in CSX’s merchandise segment unable to offset weakness in CSX’s intermodal segment. However, CSX’s operating expenses were down 3 percent to $1.76 billion, and that helped CSX’s operating income to grow by 2 percent to $1.31 billion in the second quarter of 2019 compared with $1.28 billion for the same period in 2018.
CSX’s merchandise commodities include forest products, agricultural products and automotive products.
Meanwhile, service metrics improved in the second quarter, with average train velocity rising 14 percent to 20 miles per hour and average dwell time falling 6 percent to 9.1 hours. CSX defines dwell time as the average amount of time in hours between car arrival to and departure from the yard.
CSX also reported that it successfully completed the installation and activation of positive train control (PTC) across its network, so that it now operates nearly 13,000 PTC-equipped track miles. Foote said CSX was on pace to have the system fully tested and operational with its tenant railroads ahead of the federally mandated PTC implementation deadline of December 31, 2020.
“I am extremely proud of our dedicated CSX employees for once again achieving new record levels of efficiency this quarter, while also driving a significant improvement in safety,” Foote said. “These results reflect the strength of our operating model, and combined with continued improvements in our best-in-class customer service, represent significant progress toward our goal of being the best run railroad in North America.”