CSX on plan: More job cuts, capex to shrink

Executives told investors Thursday that they would continue the streamlining begun by Harrison, improving profits by making do with fewer railcars, locomotives and trains, eliminating jobs, slashing capital expenses, and selling off portions of the network.

The railroad is also targeting an operating ratio of 60% by 2020, down from 67.9% at the end of 2017.

“Our continued focus on service and efficiency improvements have helped generate momentum in our effort to create a better product offering for customers and strong financial returns for shareholders,” said President and CEO James M. Foote on Thursday.

“While our scheduled operating model has already produced significant operational and financial benefits, substantial opportunities exist to further optimize the network, leverage excess capital, create savings and grow our franchise.”

Foote succeeded Harrison, who died in December.

The railroad forecast compound annual revenue growth of 4% in 2019 and 2020, average annual capital expenditures of $1.6 billion through 2020 – down from $2.7 billion in 2017. Executives said the carrier would repair and replace track, but did not plan to buy new locomotives.

Cash flow of $8.5 billion is forecast from 2018 to 2020. Planned sales of existing routes and real estate could bring in an estimated $800 million, to help fund the repurchase of $5 billion worth of shares by the first quarter of 2019.

“Today marks the beginning of a new chapter for CSX, and we’re confident we have the right plan and the right team in place to achieve our goal of becoming the best railroad in North America,” said Foote. “The foundation of scheduled railroading has been set, and we expect to identify real growth opportunities that will benefit shareholders as our changes take hold.”

In a note to investors, Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl, wrote, “The 60% operating ratio expectation for 2020 is a bit better than consensus’ 60.6%. Revenue growth guidance for “slightly up” in 2018 and a 4% ompound annual growth rate (CAGR) in 2019 and 2020 are consistent with consensus forecasts. We had been looking for revenue CAGR of 6% over the 2019-2020 time frame, slightly above guidance, but modeled a 61.9% OR in 2020. The ~630bps of OR improvement over the next three years is expected to come despite a profitability mix headwind. Coal should decline, and intermodal revenue growth is expected to exceed that of the overall business at 5% in 2018 and 8% on average in 2019 and 2020.

“The last 12 months have seen a massive amount of organizational and operational changes at CSX. We don’t expect to see anything close to the magnitude of network changes like we’ve seen over the past year but do expect the company to reduce its workforce by over 20% between now and the end of 2020.These workforce reductions, the benefits of a much improved network, a favorable rail pricing environment and minor operational changes going forward, should enable CSX to hit its 60% OR target by the end of the decade

“The biggest benefit of the investor day in our mind was the opportunity to meet the new senior leadership and better understand some of the specifics of the new operating model. Management was clear that CSX has done more in the past year than Canadian National did in its first two years of implementing the precision scheduled railroading playbook.

“We expect that CSX will become a more nimble, dynamic railroad in the coming years as many layers of management have been reduced. The company has consolidated its structure into four operating regions from nine. The number of hump yards (where “railcars go to die”) has been cut by two-thirds to four, from 12. CEO Foote suggested there may be more work to do on that front. Decentralization of operational decision-making will likely prove to be a key component to customer service improvement and employee retention over time. Another example of how the company has improved its decision-making capabilities is through the production of daily morning reports. The report gives a 360 degree view of the railroad’s Key Performance Indicators. We were actually surprised to hear that didn’t exist before as the ability to not only gather but analyze data on a frequent basis almost always leads to better decision making and improved performance.

“The railroad’s footprint (labor, real estate, track) is likely to shrink in the coming months. The company expects to sell at least $300 million worth of real estate between now and 2020 (and this could be a conservative estimate). Management noted that they are not just looking to sell assets but rather place assets in the right hands. We think that could provide an opportunity for [short line operator] Genesee & Wyoming (already a huge interchange partner of CSX), always one to assess asset sales from the Class 1s, to acquire complementary infrastructure.

Seidl raised his 2018 earnings estimate to $3.08 from $3.05 largely due to a lower sharecount. “We are lowering our 2019 EPS estimate to $3.50 from $3.55 as an improved OR and lower sharecount is offset in part by a lower revenue base. However, we’re raising our 2020 estimate to $3.95 from $3.85 as an improved OR and share repurchases more than offset a reduced revenue forecast. Our new price target is $62, up from $61 as we continue to apply the same 20x multiple on our 2018 EPS estimate.”