CSX Corp. reported higher revenue and earnings in the second quarter, as the Jacksonville-based railroad company benefited in part from pent-up demand from the harsh winter in much of the country.
However, the spring brought more sustained demand for the company’s freight services, and that is fueling optimism of continued revenue growth for the rest of this year, Executive Vice President and Chief Financial Officer Fredrik Eliasson said in an interview Wednesday.
CSX late on Tuesday reported second-quarter earnings of 53 cents a share, 2 cents higher than the second quarter of 2013, with revenue growing by 7 percent to $3.2 billion.
“Early on in the quarter, we did see the benefit of the pent-up demand,” Eliasson said. But since the beginning of May, the company has been seeing more normal demand, he said.
Eliasson said there are three drivers of CSX’s revenue growth. One is industrial demand, and a second is increased market share from “moving traffic off the highways” to the railroad.
The third driver is a rebound in domestic coal demand as utilities restock their inventories. Eliasson said coal demand had been weak since the beginning of 2012, but it has turned around.
“It took a long time to work those inventories down,” he said.
Domestic coal volume rose by 16 percent in the second quarter, but that was offset somewhat by a 10 percent drop in export coal transported by CSX.
Also in the energy sector, CSX has been transporting more crude oil on its railway, but Eliasson said it still represents only about 2 percent of its overall volume.
“It’s a fast-growing business but it’s also a very small part of our overall business,” he said.
The growth of crude-by-rail is raising safety concerns, and CSX and other railroads are likely to see more stringent safety regulations from the federal government.
“It will drive up the customer’s cost on the tank cars to some degree,” Eliasson said, but “ultimately we think additional regulation is important” for safety reasons.
To take advantage of additional growth opportunities in areas including crude oil and the company’s intermodal business, CSX on Tuesday announced it is increasing its capital spending plans for 2014 by $100 million to $2.4 billion.
Eliasson said the additional money will be used for extra rail cars to handle increased automotive shipments and intermodal traffic, as well as adding capacity in the northern part of its network to support crude shipments.
CSX’s rail network covers most of the Eastern U.S.
The increased revenue, as well as better weather, helped CSX control its expense ratio during the second quarter. The company’s operating ratio – its operating expenses divided by revenue – jumped to 75.5 percent in the first quarter, due largely to added expenses from weather-related disruptions.
However, the operating ratio fell back to 69.3 percent in the second quarter.
Eliasson said the company is looking for additional improvement in the operating ratio.
“We’d like to be in the 60s next year,” he said.
CSX is projecting “modest” earnings growth for all of 2014, but it is hoping to grow earnings by a double-digit percentage annually beginning in 2015.
“The visibility of our core earnings is becoming clear to analysts,” Eliasson said. “We’re on track to create shareholder value.”
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