March 2, 2018
CSX accomplished the most important thing they set out to do yesterday at their big, long-anticipated Investor & Analyst Conference in NYC (having already scooped themselves by unveiling their big buyback program and unveiling their 60% - down over 600bps - OR Target for 2020): They revealed management depth and competence and commitment to PSR and beyond. The house was packed, the coffee plentiful. The Show was good. They were light with numbers (price goals, almost of course, but also volumes) but strong on process and belief and depth – and on the emergence at CSX of the “Post-Hunter” railroad as we have seen at CP and CN. CSX was described as dedicated but segmented (often by predecessor railway) bureaucratic and change-averse pre-PSR – that isn’t the case today, for sure. It is much more streamlined, data-driven and integrated. Hopefully this was done without too much collateral damage as we enter a new era….CSX made a strong case for itself and I am, if not yet fully convinced, a believer.
Jolly Good Show (less spectacular than the old days): It wasn’t perfect, and it did lack the pizazz of the old Hunter/Elvis shows (as a reminder, Hunter-led presentations have involved bands, Apple products and even Giraffes in the past). Interestingly, all of the 12 speakers said something like “PSR – Precision Scheduled Railroading….or ‘Scheduled Railroading’, or….Are we seeing the beginning of re-branding? The day before the Conference, a CSX employee and self-described “whistle-blower’ sent out an 8 page screed to the financial community, full of bile, talking about the new, tough talk of the Hunter/Jim regime (New? In railroading? Where M-F is a nice greeting?!?). It also got mean and personal (calling out, for example, one of the speakers as being a meanie). But he (“Will Tell”) did bring up 4 things that, in retrospect, were not covered:
Safety – yeah, we started with a briefing but that was the last time it came up – unusual for a railroad. The comments also suggested that CSX had underspent on MoW – which the numbers don’t back up.
Long trains are a focus – often with DP (Distributed Power) – but while they work on the western (and Canadian) long flat hauls, do they work as well in the mountainous terrain of large swaths of CSX?
While headcount reductions are a positive (to the Street, anyway), and “doing more with less” is a PSR mantra – are there enough “boots on the ground” (and clerks on the phone)?
Morale – good question though really hard to answer fully – The CSX folks in NYC, the 12 speakers and the numerous others, were united in their belief that the morale ship had been turned back in the right direction….
In addition, although there were a few questions on technology (not nearly as many as on OR, unfortunately), this was an issue that wasn’t fully addressed (as compared to , say, CN’s Investor Conference last June).
They day before I listed the Top 10 things I looked for from the Big Event:
What’s left to be done in the PSR transition (heavy lifting or light maintenance work?) CSX continued to state that the “H/L” was done, but COO Ed Harris and team stated that the Trip Plan process (critical to PSR and scheduling by rail car, as opposed to “train planning); VP-PSR Railroading Implementation Jamie Boychuk of Winnipeg, under whose leadership yard conversion, CSX-system integration and Trip Planning falls, was a hit with the crowd….
Does CN’s well (overly?) publicized service issues mean, as an analyst (staggeringly) asked of them, that PSR is a one-trick pony? This question was always facetious – I don’t think it is true of CP or CN (to whom it was asked). CSX highlighted their service recovery (even claiming to be the best in North America at present, which unfortunately isn’t as tough a comparison as it ought to be) and a growth plan predicated on taking share in car load and intermodal that would require consistent and improving service.
How has CSX’s service recovery progressed? This is big – at SWARS Foote said that CSX was fluid and essentially recovered from its self-imposed issues that began in the summer….He has spent the winter on his self-named “Apology Tour”., but said that it over now – CSX “no longer has to apologize for its service”! CSX continuously stated that the summer ’17 (“when Hunter bombed the network” with radical, rap[id change) was an aberration (caused in part by “going too far too fast” that has been corrected. While not all were convinced, CSX velocity was up 30% from the summer doldrums, and dwell down 22%.
How has Norfolk Southern’s own service issues- and CSX’s recovery - impacted the rail competitive situation in the East/Southeast? Their growth expectations in intermodal, for example, suggest regaining share from railway as well as the (troubled) highway, but CSX didn’t directly address the issue (as expected, if not hoped). But pricing looks positive from both perspectives and the idea that revenues will accelerate over the three year period from a slowish start this year (to achieve an overall 4% CAGR) even as expected economic growth actually follows the reverse pattern (Estimated GDP growth rate is to drop from +2.6% in ’18 to +1.9% in -the election year of - 2020, according to HIS) is also suggestive.
Whom Ed and Jim have identified as “next-gen” CSX leaders (so far): New COO, PSR veteran Ed Harris discussed his long career, excluding his CSX advisory but mentioning his role with Rio Tinto in Australia (where I am heading tomorrow), the leader in driverless train technology application….No one as yet filling the CMO position (I have some ideas) but unlike the long period of PSR transition at CP, in this case marketing is the CEO’s bailiwick. In terms of completing the operational transformation, the Ops leadership team under Harris, who presented first, including Boychuk (above) and Rice (below) and Jermain Swafford, CTO (who said there was a “whole buffet” – the food kind not Warren – “of opportunities still at CSX”), were sharp and exuded competence and confidence (one smart investor said that because of the Ops presentation, this was “the best CSX meeting he had seen in his decade plus of following the company; I concur).
What strategic decisions might be (or have been) re-thought (such as the Baltimore tunnel, etc) – The intermodal strategy will include Northwest Baltimore (Ohio), but not as originally envisaged as a “hub’ as CSX has moved from a “H&S” strategy; line segments are under review (see below) and so is the decision not to expand the Baltimore tunnel. We’ll see on Capex (whose 3-year average spend of $1.6B is down some $1.1B – or 40+% - of the 2016 level)
From Michael Rutherford (RailTrends, 2017) on how the industrial (car-load) products business will benefit from PSR (the “point of the spear”). Merchandise revenue 3-year CAGR is 4%, ahead of GDP and at the company goal level, so that is something. Rutherford, as he outlined at RailTrends last year (and at NEARS etc – he has been a road warrior on the Winter 2016-17 Apology Tour) said that his Merchandise unit is pivoting to growth, with 2018 the inflection year.
From Dean Piacente (RT ’16) on what the new Intermodal strategy will look like (and the future of North Baltimore and the Harrison reversed hub-and-spoke strategy). Intermodal has shifted to a point-to-point strategy as mentioned before and above. Intermodal shed some 7% of its business in the PSR restructuring to date (and the changed strategy) and has already apparently made up that book of business. Its Goal revenue CAGR of 8% is aggressive, and doable - Intermodal growth will be helped by highway conditions, and – perhaps, NS conditions, but be hindered by drayage driver shortage (the primary reason why intermodal dwell is suffering YTD industry-wide). CSX plans to ride the wave of future east coast port market share into the Ohio valley is something that I am skeptical of – but I do like their plans to take more rail share (20% to 25%) of east coast landings with offerings like Wilmington (NC) to Charlotte.
Note – this (Merchandise forecasted CAGR +4%, IM +8%) implies that the third major commodity segment – coal, will obviously grow below the 4% company target to 2020 - beginning with a flattish 2018 outlook – which may be optimistic. CSX expects a slight increase in its (“volatile”) export loadings and a less-sharp secular decline in its utility coal volumes. To that end, it has improved its cycle times by 20% and appears to be somewhat, er, “flexible” on coal pricing.
The extent and nature of the CSX short-line strategy (how realistic is the “8000 miles under review” commentary; what are the actual segments and timing); there is a lot of money out there! By “a lot of money” I was referring to the huge pools of dry powder; CSX sees some $600mm – not in plan – if they sell some segments, including the two (FL & IL) we know are “in process”. They stated that the rumor-mill (“8000 miles to be under review”) was inaccurate, though there were no direct corrections. Amy Rice, as VP of Strategic Planning in charge of this and other transformative strategic aims, is clearly thought of as a rising star (she was described as “really smart” so often I thought we might see Stephen Hawking roll out to give his endorsement; that said, it is indeed nice to see the team show enthusiasm for their members and she did fit the bill).
From CFO Frank (“Lone Survivor”) Lonegro on guidance (hopefully more longer term and little short term; and even more hopefully more on ROIC than OR!) ROIC wasn’t mentioned – and this here was my only real disappointment – not in Frank’s excellent, concise (maybe even “brief”) presentation, but in discussions around OR and FCF generation (not unimportant, to be sure) – and not ROIC or some other measurement. CSX went to great pains to show that the capex reductions weren’t network muscle (but locos, rolling stock, PTC as it evolves, and lapping some big projects such as the Virginia Avenue tunnel in DC) – they brought full Ops teams to chat during the breaks in a reassuring way.
Next up – coming reports on Capex, AV & the Coming Winter, and Updates on railroading Down Under….
Anthony B. Hatch