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After a Solid 1Q17, CSX Pins Its Hopes on Hunter Harrison

PART:
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Part 5
After a Solid 1Q17, CSX Pins Its Hopes on Hunter Harrison PART 5 OF 6

Why CSX’s Operating Margin Fell in 1Q17

CSX’s operating margins

In the first quarter of 2017, CSX’s (CSX) operating income rose 1.1% to $712.0 million from $704.0 million in 1Q16. In 1Q17, CSX posted operating margins of 24.8% in contrast to a 26.9% operating margin in 1Q16. This trend indicates a 2.1% deterioration in the company’s operating margins in 1Q17. 

Why CSX&#8217;s Operating Margin Fell in 1Q17

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Composition of operating expenses

Fuel charges for CSX increased by $68.0 million (or 45%) in 1Q17 compared to 1Q16. This was mainly due to the relative rise in fuel prices in 1Q17. The labor and fringe expenses, however, decreased by $7.0 million (or 1%) during the quarter, mainly due to headcount reduction. The material, supplies, and other expenses rose by $17.0 million (or 3%) in the first quarter of 2017 due to aligning resources to match relatively higher volumes.

In 1Q17, CSX posted $123.0 million in efficiency gains. Its 1Q16 results also include a $173.0 million restructuring charge. In March 2017, CSX implemented layoffs of about 765 of its management-level staff. The restructuring charges represent one-time costs associated with the workforce reduction. 

This cost-cutting initiative saw the company attaining $430.0 million in efficiency gains and $175.0 million in volume-related savings.

Management outlook

CSX aims for an operating ratio in the mid-60s, or an ~40% operating margin by the end of 2017. The company plans to undertake precision scheduled railroading under the leadership of its incoming CEO, Hunter Harrison. Precision scheduled railroading involves running a scheduled network at a high level of reliability.

CSX expects its average headcount to be down on a sequential basis in the coming quarters. The company also anticipates that its fuel expenses could rise in the rest of 2017. The higher cost per gallon year-over-year would most likely increase CSX’s fuel expenses if crude oil prices continue to rise.

CSX’s peers Norfolk Southern (NSC), Union Pacific (UNP), Genesee and Wyoming (GWR), and Canadian Pacific (CP) have taken efforts to minimize costs. These initiatives include decreasing headcounts, combining divisions, and shifting locomotives from fewer volume networks to growth network areas.

With the exception of Canadian Pacific, the US-based railroads mentioned above are included in the portfolio holdings of the iShares US Industrials ETF (IYJ). IYJ holds 6.2% of its portfolio in railroads.

In the final part of this CSX post-earnings series, we’ll see what analysts have to say after CSX’s 1Q17 results.

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