CSX’s Earnings Dip Due To Cold Weather Related Disruptions

CSX Corporation’s (NYSE:CSX) revenue grew 2% in the first quarter of 2014 to just cross $3 billion due to growth in its intermodal and merchandise shipments. ^[1] However, its net earnings fell drastically owing to the higher operating costs driven by the harsh winter weather. Net earnings declined 14% year-over-year to reach $398 million, thereby negatively impacting earnings per share by 11%. Given the poor earnings performance in the first quarter, CSX expects that growth in earnings per share for the full year will be somewhat moderate compared to the company’s earlier guidance of 10-15%.

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Harsh Winters Drive Up Operating Costs

CSX’s operating ratio, which is its operating expenses expressed as a percentage of revenues, increased 5.2% compared to the previous year’s first quarter to reach 75.5%. ^[1] Operating expenses increased $190 million due to high costs associated with weather disruptions and inflationary pressure on input costs.

In order to facilitate smooth functioning of the railroad and timely delivery of shipments during the harsh winter, CSX had increased crew and locomotives employed. Around 75% of the $47 million increase in CSX’s labor and fringe expenses can be attributed to an increase in crew combined with a 50% increase in overtime due to the weather conditions. Weather disruptions and recognition of sale of a rail corridor in the previous year drove up material, supplies and other costs.

Fuel expenses increased $2 million dollars due to a 4.8% increase in consumption driven by the cold weather. However, this was considerably offset by decline in average price per gallon which decreased 5% compared to the first quarter of the previous year.

Export Coal Offsets Growth In Domestic Coal Shipments

CSX’s domestic coal shipments, which have been trending downwards for the past two years due to the competition from natural gas, finally seem to have turned around. Domestic coal volumes increased 8% year-over-year from 20.9 million tons to 22.5 million tons. ^[1] Most of this growth comes from the increase in coal shipments to the northern utilities driven by declining inventories and severe winter weather.

Soft global coal markets led to a decline in export coal volumes.  Metallurgical coal (coal used to make coke for the iron and steel industry) and thermal coal (coal used for power generation) volumes declined 11% and 19% respectively, leading to a 15% decline in coal volumes. U.S. coal is facing pressure from declining global coal prices due to the oversupply created by the comeback of Australian coal producers and declining demand from China.

Declines in CSX’s export coal shipments more than offset the growth in domestic coal leading to a 1% decline in overall coal volumes and an 8% decline in revenue per unit. This led to a 9% decline in revenue from coal shipments.

For the second quarter 2014, CSX expects domestic coal shipments to continue to grow driven by declining inventories at utilities and rising natural gas prices. However, export coal may remain stagnant, suffering from soft global coal market conditions.

Merchandise Volume Growth Tempered By Impact Of Harsh Weather

CSX’s merchandise volume grew at a moderate pace of 2% in the first quarter of 2014, having suffered a decline in shipments of various commodities due to the severe weather. Combined with 2% increase in revenue per unit, the segment’s revenue increased 4%. ^[1] Growth in shipments of agricultural products, chemicals and forest products offset the decline in shipment of other commodities.

Overall agricultural shipments grew 4.4% driven by 12% growth in shipment of agricultural products such as corn, soybean and ethanol. However, this was partially offset by declines in the shipments of rice, beans, refrigerated products, fertilizers and phosphates due to disruptions caused by the severe weather. Shipments of agricultural products grew due to a significant increase in production of corn and soybean in the U.S. in 2013. Corn production grew from 273 million tons in 2012 to 355 million tons in 2013 and soybean production grew from 82.5 million tons in 2012 to 88.6 million tons in 2013. ^[2] Additionally, higher corn production led to lower corn prices which encouraged ethanol producers to increase production and export, thereby adding to volumes of ethanol shipments.

Industrial shipments grew 2.6% driven by growth in chemical shipments which were partially offset by declines in automotive and metal shipments. Increase in crude oil and liquefied petroleum gas production driven by the shale drilling activity helped boost chemical shipments by 12%. Crude oil production in the U.S. has increased from 6.48 million barrels per day in 2012 to 7.44 million barrels per day in 2013. ^[3]  Automotive and metal shipments declined due to disruptions caused by the severe weather.

Housing and construction shipments declined 1.8% primarily due to weather related difficulties. Growth in building products driven by the improving residential housing market was unable to offset declines in shipments of crushed stone, sand, gravel and waste material.

For the second quarter 2014, CSX expects to see growth across all merchandise shipments driven by growth in end markets such as agriculture, automotive, crude oil and construction.

Modest Growth In Intermodal Business Revenue

CSX’s intermodal revenue grew 4% in the first quarter 2014 due to 5% growth in volumes. ^[1] Both domestic and international intermodal shipment grew during the quarter. However, the revenue per unit declined 1% due to weather disruptions negatively impacting domestic door-to-door services, which command higher revenue per unit.

CSX will be opening a new intermodal terminal in Montreal later in the year. We believe that the intermodal business is a long term growth driver for CSX due to growing global trade and investment in capacity expansion.

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1. CSX First Quarter 2014 Financial Report , April 15 2014, www.csx.com [↩] [↩] [↩] [↩] [↩]
2. National Agricultural Statistics Service – Crop Production, www.usda.gov [↩]
3. Short Term Energy Outlook, April 8 2014, www.eia.gov [↩]