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CSX 4Q far below estimate
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December 20, 1999: 6:23 p.m. ET
Company blames Conrail integration, weak results at recently sold Sea-Land
By Staff Writer Chris Isidore
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NEW YORK (CNNfn) - CSX Corp. warned analysts late Monday that its earnings in the fourth quarter will less than half of expectations, as it blamed congestion problems with its integration of Conrail and poor performance at its recently sold ship line Sea-Land Service Inc.
The company said net income for the quarter would be between 18 and 24 cents a diluted share. Analysts surveyed by First Call had been looking for 53 cents a share in the quarter.
Those earnings estimates already had been reduced from an average of 74 cents a share three months ago, before the company started warning of problems in this quarter during its third quarter earnings release.
While no rail analyst is surprised by the continued problems at CSX, the depth of the problem was a shock.
Conrail Conniptions
"Essentially the song remains the same if not sadder," said Terry Gardner, analyst at Deutsche Banc Alex. Brown, who had cut his earnings estimate for the quarter to 35 cents a share only last week. "We're watching the operational statistics very closely. We're trying to find the bottom in earnings. Apparently we haven't found it yet."
A difficult merger
The CSX news was overshadowed by the announcement Monday morning that two competitors, Burlington Northern Santa Fe Corp. and Canadian National Inc., had reached an agreement for the largest merger in rail history. But it was also a cautionary tale for the BN-CN deal, as it showed again how difficult it is to merge together disparate railroads.
"Earnings have suffered this quarter and throughout the year as we have changed the composition of our company and implemented the most complex rail merger in history," said John Snow, chairman and chief executive of the company.
CSX and Norfolk Southern Corp. (NSC). purchased Conrail last year, and split the eastern railroad's assets between them, with integration into their systems as of June. 1.
"We had difficulty handling strong fourth quarter demand and changing traffic flows, particularly in the northwestern sector of our new, combined rail network," said Snow's statement. "As a result of this congestion, locomotive, equipment and crew costs were much higher than we expected."
Paying to meet customer demands
Gardner said that CSX is facing larger than expected costs hiring trucks, barges, even planes in some circumstances to meet customer service demands when it can't fulfill them by rail.
"We're feeling the earnings impact of them trying to ensure customer satisfaction," Gardner said. "If that's the near term penalty, they'll take it because the benefits longer term are good."
The company also pointed to problems with the international operations of Sea-Land, which it sold to its partner, Maersk Line, on Dec. 10 for $800 million.
CSX's statement said not only did container shipping rates fall around the world during the quarter, but additional costs were incurred as operations prepared for the transition to Maersk.
Therefore Sea-Land's international operations will be break-even for the quarter, rather than the $103 million in operating income it posted in the third quarter. Analysts were looking for a strong contribution in its last quarter with CSX.
But Gardner said he was told that many customers of Sea-Land started shifting business to Maersk in recent months as a way of building up buying clout coming into the upcoming contract negotiation season. While Maersk may have turned around and placed some of that business back on Sea-Land ships, they did so at a lower rate.
Are the problems behind it?
The company's statement said it believes things will improve in the new year.
"The sale of Sea-Land's international container business strengthens our financial position, reduces capital requirements and should make earnings more predictable. In 2000 and the years ahead, we will be concentrating the lion's share of our energies to streamline rail operations and capture the substantial growth and productivity opportunities available to us from the Conrail merger."
But Gardner says we may not have seen the end of earnings problems for either CSX or NS from their purchase of Conrail.
"I think it's a wipe-out quarter. I think the first quarter is also going to be a wipe-out," he said. He has a "hold" recommendation on the stock. He recently lowered his first quarter earnings estimate for CSX to 50 cents a share, below the First Call consensus of 70 cents a share. "I may have to trim it a little bit more," he said.
CSX's stock was down 3/4, or 2 percent, to 34-1/4 at the close of composite trading Monday afternoon in New York. There was no after-hour trading of the stock in the first two hours after the announcement. 
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CSX Corp.
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