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Basch Report
Jax Daily Record Thursday, Oct. 18, 201805:20 AM EST

The Basch Report: CSX forecasting growth of 6 to 8 percent, plans more job cuts

Railroad third-quarter results top expectations.
by: Mark Basch Contributing Writer

CSX Corp. on Tuesday reported third-quarter results better than analysts expected, and also better than its new management team had forecast at the beginning of the year.

“As I sit here today only eight months since our investor conference, by almost any measure we are ahead of where I thought we would be,” CEO James Foote told analysts in a conference call.

Earnings in the quarter doubled to $1.05 a share, higher than analysts’ forecasts which ranged from 87 cents to $1, according to Yahoo Finance.

Revenue rose 14 percent to $3.13 billion, with most categories of freight transported by the railroad showing volume gains.

Perhaps most significantly, Jacksonville-based CSX’s operating ratio (operating expenses divided by revenue) was 58.7 percent, down from 68.4 percent in the third quarter of 2017 and the second straight quarter below 60 percent.

“Eight months ago, we put out a target to have a 60 (percent) operating ratio in three years and I think at that point in time everybody thought we were crazy and that couldn't be done,” Foote said.

“Now we've come in with two consecutive quarters in a row of not industry-leading, but (an operating ratio) right there with anybody else in the industry.”

One reason for the improvement in the operating ratio is the increase in revenue. Foote said CSX was expecting revenue to grow by a mid-single-digit percentage this year, but the company now is forecasting growth of 6 percent to 8 percent.

CSX CEO James Foote

“Clearly, we are doing better than we expected coming into the year. A lot of this is due to the continued strength of export coal, but all of our business groups are doing well,” he said.

CSX also is improving efficiency with cost reduction measures, including job cuts over the past two years.

The company’s employee count at the end of the third quarter was 22,562, down from 24,388 a year earlier.

“Our plan will be to continue to see a reduction in the headcount,” Foote said.

“In January we said we're going to take 2,000 employees out of the company this year. We’ve already got 2,000 employees out of the company this year,” he said.

Foote said CSX will have a new target for employee reductions next year and “what that number is, at the right time, we'll articulate it to you.”

CSX cut 4,600 jobs in 2017, including consultant positions, and said in March it was targeting 6,200 additional cuts by the end of 2020.

Analysts asked if increased freight volumes could affect headcount targets.

“When we get to the point where we need to handle the volume, we're not going to run ourselves out of a couple brakemen here and there to screw up the railroad. So, we'll pivot, we'll adjust,” Foote said.

Chief Financial Officer Frank Lonegro said CSX had minimal financial impact from the two recent major hurricanes to hit the Southeast.

Hurricane Florence will affect earnings by about 2 cents a share, mainly due to lost revenue because of the storm, he said.

“With respect to last week's Hurricane Michael, given the location of the landfall and the speed of the storm, we do not expect the impact to be significant in the fourth quarter,” he said.

Lonegro said CSX lost more than 5 miles of tracks that were washed out by flooding from Florence.

CSX has been under fire from residents of Lumberton, North Carolina, who say the company did not take action to shore up an underpass owned by CSX to prevent flooding.

The issue was not addressed in Tuesday’s conference call.

SharedLabs Inc.reduces size of IPO

SharedLabs Inc. is reducing the size of its planned initial public offering, according to an updated registration statement filed last week with the Securities and Exchange Commission.

The Jacksonville-based IT services company previously filed plans to sell up to 2.5 million shares at $5 to $7 each, but last week's filing said it now plans to sell 1 million new shares at the same price range.

In addition, current investors in the company intend to sell about 1.14 million existing shares in the IPO.

The largest outside stockholder, investment firm Race Holdings LLC, plans to sell 675,000 of its 2.125 million shares, reducing its stake from 24.5 percent to 16.7 percent.

SharedLabs CEO Jason Cory is the largest stockholder with 2.55 million shares, or 31.9 percent.

With the reduced number of new shares, SharedLabs would receive net proceeds of about $4.9 million after expenses if the 1 million shares are sold at the midpoint of the price range, the company said in last week's filing.

It previously had estimated proceeds of $13.6 million if it sold 2.5 million shares.

SharedLabs recently moved its headquarters to the Dyal-Upchurch Building at 6 E. Bay St. Downtown with the help of $100,000 in incentives approved in July by the Jacksonville City Council.

The company promised to create 107 new jobs as part of its incentives application.

St. Joe reports ‘minimal’ damage from Michael

The St. Joe Co., which develops properties along the Gulf of Mexico in the Florida Panhandle, said the majority of its portfolio experienced “minimal damage” last week when Hurricane Michael devastated the region.

St. Joe moved its headquarters in 2010 from Jacksonville to WaterSound, a community it created as it focused operations on its huge property holdings in the Panhandle, much of it undeveloped beachfront land.

WaterSound and other properties developed by St. Joe over the past decade are largely west of Panama City.

St. Joe said Friday its resort properties in Walton and Bay counties suffered “minor landscape damage” and on Monday it announced several oceanfront properties, including the WaterColor Inn and Resort and the Pearl Hotel in Rosemary Beach, were open again.

The company said two of its properties farther east, the Bay Point Marina on a lagoon in Panama City Beach and the Port St. Joe Marina in Gulf County, “suffered significant loss and will require long-term restoration.”

St. Joe did not give financial estimates for damage it incurred.

Johnson & Johnson Vision sales rise 3.8 percent

Johnson & Johnson on Tuesday said third-quarter sales at its Jacksonville-based vision care business rose 3.8 percent to $1.13 billion. That included a 4.4 percent rise in contact lens sales to $835 million.

Sales growth would have been higher but foreign exchange fluctuations impacted overseas sales.

New Jersey-based Johnson & Johnson reported total sales for the quarter rose 3.6 percent to $20.3 billion.

Adjusted earnings for the medical products giant rose by 15 cents to $2.05 a share.

Analyst neutral on Advanced Disposal

Ahead of its Oct. 31 earnings report, Morgan Stanley analyst Toni Kaplan last week initiated coverage on Ponte Vedra-based Advanced Disposal Services Inc. with an “equal weight” rating.

“Though we are attracted to the defensive nature and stability of the waste industry, along with the positive industry outlook in the next 1-2 years, we think Advanced Disposal shares reflect this sentiment and are fairly valued,” Kaplan said in her report.

She set a 12-month price target of $27 for the stock, which was trading at $25.79 at the time.

Advanced Disposal's stock has performed well since its IPO two years ago at $18 a share, but Kaplan said the price increase is tied more to industry speculation than earnings growth.

“As waste stocks tend to outperform during a recession (outperformed the market by 28 percent in 2008), we interpret Advanced Disposal's (and other waste stocks) recent multiple expansion primarily to investor positioning to hedge against a market pullback,” she said.

“Given that Morgan Stanley's strategists are not expecting a sustained market downturn, we think there is downside risk to the multiple and would stay on the sidelines.”

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