CSX Q4 2015 Earnings Review: Lower Fuel Expenses And Productivity Improvements Offset Impact Of Top Line Headwinds On Results

CSX Corporation (NYSE:CSX) released its fourth quarter earnings results on January 12 and conducted a conference call with analysts the next day. ^[1] Lower fuel expenses and the company’s productivity improvement initiatives helped offset the negative impact of lower fuel surcharge revenues and shipment volumes on the company’s results. The impact of the company’s efforts to prop up its bottom line was reflected in CSX’s operating ratio (operating expenses as a percentage of revenues), which improved marginally to 71.6% in Q4 2015, as compared to 71.8% in the corresponding period last year, despite significant top line headwinds. ^[1] Lower fuel surcharge revenues and shipment volumes drove down CSX’s quarterly revenues to $2.78 billion, around 13% lower year-over-year. ^[1] The key takeaway from the earnings conference call was the management’s commitment toward controlling expenses, given that the company’s shipment volumes are likely to remain subdued in 2016 as well.

Top Line Headwinds

Lower fuel surcharge revenues and a decline in shipments adversely affected CSX’s Q4 revenues. CSX’s fuel surcharge revenues are tied to two month lagged values of diesel prices, which declined considerably in Q4 2015 due to the decline in oil prices.

Weakness in Brent Crude Oil Prices, Source: Y Charts

Lower fuel surcharge revenues negatively impacted the company’s top line by $198 million. ^[2] Besides the decline in fuel surcharge revenues, the decline in CSX’s shipments in Q4 negatively impacted the company’s top line by $175 million. ^[2] Shipment volumes were around 6% lower year-over-year in Q4, primarily due to a sharp decline in coal shipments. ^[1]

CSX’s coal shipments fell 32% year-over-year in Q4 2015, largely due to weakness in demand for both thermal and metallurgical coal. ^[1] The demand for thermal coal, which is used in electricity generation, has declined due to an unfavorable regulatory environment and the prevailing weakness in natural gas prices. As a part of the federal government’s measures to lower carbon dioxide emissions, regulations introduced last year target a 32% reduction in power plant carbon dioxide emissions from 2005 levels by 2030. ^[3] As coal-based power plants have a much higher emissions intensity vis-a-vis natural gas based ones, the regulatory environment supports a greater proportion of natural gas based power generation going forward. Besides the adverse regulatory environment, weak natural gas prices have accelerated the pace of adoption of natural gas as the preferred fuel for electricity generation. Natural gas prices averaged less than $3 per million British Thermal Units (MMBtu) in 2015 and are expected to do so in 2016 as well. ^[4] This level of gas prices favors the increasing adoption of natural gas as the preferred fuel for electricity generation going forward, undermining the demand for thermal coal.

Besides thermal coal, the demand for metallurgical coal, which is used as a raw material in steel production, has also declined considerably. Oversupplied global markets, weak steel prices, and a strong U.S. Dollar have negatively impacted the company’s met coal shipments, which are meant for international markets. Oversupplied global markets are likely to limit the growth in the company’s met coal shipments in the near term as well.

Lower Operating Expenses

CSX’s operating expenses declined around 13% year-over-year to $1.99 billion in Q4, primarily due to a $160 million, or 44%, year-over-year decline in fuel expenses. ^[1] The reduction in fuel expenses was primarily due to an approximately 32% year-over-year decline in diesel prices in Q4, with lower volumes also contributing to the decline in fuel expenses. ^[5] In addition to the decline in fuel expenses, improvements in operating efficiency and lower shipment volumes also helped lower expenses. CSX realized $184 million in savings through productivity improvements over the course of 2015. ^[2]

Outlook for 2016

With the weakness in demand for various commodities, particularly coal, expected to exert top line pressure on CSX’s results in 2016, the company management stressed the importance of improving operating efficiency in order to maintain profitability during the conference call. CSX is targeting productivity savings of around $200 million in 2016, following on from $184 million in savings in 2015. ^[2] In addition, the company is striving towards a mid-60s operating ratio in the long term, as compared to 69.7% in 2015. ^[2] While there is still a long way to go for CSX to attain a mid-60s operating ratio, the company’s emphasis on controlling costs and improving productivity should stand it in good stead in 2016.

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1. CSX Corporation’s Q4 2015 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩]
2. CSX Corporation’s Q4 2015 Earnings Call Transcript, Seeking Alpha [↩] [↩] [↩] [↩] [↩]
3. Obama’s New Climate-Change Regulations to Alter, Challenge Industry, Wall Street Journal [↩]
4. Short Term Energy Outlook, EIA [↩]
5. U.S. On-Highway Diesel Fuel Prices (dollars per gallon), EIA [↩]