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Rail News: CSX Transportation

CSX sets operating income and ratio records, increases 2010 capex


Several double-digit gains and a few financial records colored CSX Corp.’s third quarter in the black. Yesterday, the Class I reported third-quarter earnings of $414 million, or $1.08 per share, up 48 percent; record operating income of $825 million, up 39 percent; revenue of $2.7 billion, up 16 percent; and volume of 1.6 million units, up 10 percent compared with third-quarter 2009 figures.

“As the economy continued to improve, CSX saw volume growth in nearly all markets while delivering another strong performance in safety, service and productivity,” said CSX Chairman, President and Chief Executive Officer Michael Ward during an earnings teleconference and webcast this morning. “We adjusted to higher traffic volumes profitably.”

In addition, the Class I’s quarterly operating ratio improved 4.9 points year over year to a record 69.1 primarily because of resource management, process improvements and productivity.

“This is a significant milestone for our company,” said Ward.

A 6.6 percent increase in same-store sales pricing helped drive up revenue per unit from $1,562 in third-quarter 2009 to $1,657 in the previous quarter, said Executive Vice President of Sales and Marketing Clarence Gooden. Coal revenue jumped 23 percent to $835 million and volume rose 3 percent to 392,000 units as Asian and European markets sought more exports, higher industrial demand drove steel production and utility stockpiles moderated to more normal levels.

Merchandise revenue increased 15 percent to $1.4 billion and volume rose 7 percent to 643,000 units as feed, fertilizer and ethanol demand propelled agricultural product traffic and auto sales strengthened. And intermodal revenue rose 6 percent to $318 million and volume soared 19 percent to 574,000 units as retail inventory replenishment drove international shipments — which accounted for half of all intermodal volume — and truck diversions and service offerings generated domestic growth, said Gooden.

Overall, CSX’s operating margin performance exceeded expectations as volumes were modestly above seasonal trends and core pricing growth continued, said Robert W. Baird & Co. Inc. analysts in a report on CSX’s quarterly performance issued today.

The Class I “remains very well positioned to drive continued margin expansion and realize real pricing growth, supporting valuation and our constructive long-term thesis,” they said. “We are mindful of potential looming headwinds, namely decelerating margin improvement (and therefore upside surprises), and increased economic and regulatory uncertainty.”

Inflation, higher fuel prices and the need for additional resources were the primary headwinds that affected operating expenses, which rose 9 percent to $1.8 billion vs. third-quarter 2009’s level. Labor and fringe costs increased 12 percent to $731 million because of inflation, higher incentive compensation and a rise in total headcount from 29,883 in third-quarter 2009 to 30,219 in the previous quarter, said EVP and Chief Financial Officer Oscar Munoz. In the fourth quarter, headcount likely will increase another 1 percent to 2 percent to address attrition and additional volume increases, he said. Fuel costs shot up 25 percent to $279 million primarily because the average diesel price jumped 15 percent to $2.17 per gallon, said Munoz.

In part because of the strong financial performance in the quarter, but more associated with the need to keep pace with business growth, CSX plans to increase its 2010 capital expenditure budget from $1.7 billion to $1.8 billion. The additional capital will support projects designed to “create competitive advantages for customers, grow the business, create jobs and deliver shareholder value,” said Ward.

The projects primarily will focus on the intermodal sector and rolling stock, said Munoz. CSX already has invested capital this year in yard automation projects by implementing remote-control technology and installing automatic switches at 20 yard locations, said EVP and Chief Operating Officer David Brown.

In addition, CSX plans to repurchase an additional $646 million worth of shares by the end of first-quarter 2011.

After an encouraging third quarter, CSX is anticipating similar results in the fourth quarter. The outlook for every commodity segment is favorable except for emerging markets, said Gooden.

“We’re sticking to our game plan,” said Ward.

Jeff Stagl

Contact Progressive Railroading editorial staff.

More News from 10/13/2010