The energy bust has had wide-ranging impacts on the overall economy, and the railroad industry has been among the hardest hit because of the impact of falling fuel surcharge revenue on their top-line growth. CSX released its results Tuesday afternoon and discussed its most-recent quarter in a conference call Wednesday morning. In the call, CSX CEO Michael Ward and his team of executives revealed some of their thoughts about the company, in particular, and the railroad industry, more generally. Let's look more closely at five of the things that CSX's leaders said about the future for the railroad.
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CSX doesn't rely as much on coal as it used to, but it still gets a substantial portion of its business from the coal industry. In that light, the sheer number of shale-gas finds in recent years has crushed coal-mining companies, and with utilities increasingly converting coal-fired plants to use natural gas in an effort to comply with regulatory requirements, coal's rebound could take a long time to come.
CSX believes that its best course of action is to keep focusing on providing safe and reliable service, with the goal of serving customers from all of its different industry groups. That won't necessarily result in pushing CSX's financials up in the near term, but it will position the railroad to take full advantage of improving conditions whenever they happen.
CSX had hoped early on for a strong 2015, but as the year has gone on, the railroad has had to deal with unexpectedly poor conditions in several key industries. CSX still has positive views on its intermodal business, and it also believes that the automotive sector will remain strong.
Yet flat results in agriculture will likely persist in the fourth quarter, and the company sees unfavorable results from chemicals due to the poor energy market environment, metals due to the strong dollar and the reduction in domestic steel production, and coal due to global oversupply and weak utility demand. Lonegro believes that cost containment can still result in earnings growth, but CSX will have to work hard to overcome headwinds both now and for 2016, as well.
With all the attention that investors pay to shipping volumes and overall revenue, what often gets lost in the shuffle is the pricing that CSX imposes on its customers. Competitive pressures put a limit on how much CSX can charge, but the railroad's pricing power has remained fairly strong, with the company reporting gains of 4.6% overall for the quarter.
The focus that CSX has had is to provide high-quality service to customers in order to make them feel that they're getting good value even when the rates they're paying go up. With a large number of long-term customers on contracts of between three and five years, CSX thinks it can demonstrate improving service, and therefore get more revenue from customers.
One of the things that CSX has had to consider is how to make structural changes to its coal network in order to reflect the falling volumes from key producers, especially in the key Appalachian region. As struggling coal-mining companies shut down plants, it has ramifications for the rail networks that CSX has in place, and making efforts to align changing resources with shifts in demand could produce some efficiency gains and cost savings for the railroad. Sanborn said that "everything is on the table" when it comes to structural considerations, and CSX wants time to figure out the potential ramifications internally before releasing a formal strategy going forward.
Efficiency has been a huge part of CSX's recent success, with the railroad surviving falling revenue by clamping down on wasted expenses. CSX expects those efforts to continue, and the resulting favorable decrease in its efficiency ratio should make its progress clear in the long run. Already, CSX has been routinely posting quarterly efficiency ratios in the 60s, and getting that number down to around the 65% level on an ongoing basis is a reasonable goal supported by the efforts the railroad has already made.
CSX investors were generally pleased with its solid results in the third quarter, but they still want the company to work as hard as possible to keep up its positive momentum. For its part, CSX's management team remains focused on doing what it can to grow going forward.
The article What CSX Sees Coming Down the Tracks originally appeared on Fool.com.
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