Executive Spinning Wheel Spins Faster; Conferences Yield Few Nuggets - and Good News out of DC?

May 31, 2019

Greetings;
Greetings – the biggest news first (CN’s Investor Conference will be previewed in a day):

What goes up must come down
Spinnin' wheel, got to go round
Talkin' 'bout your troubles, it's a cryin' sin
Ride a painted pony, let the spinnin' wheel spin
/BST

Blood, Sweat & Tears in Jacksonville:  Just when we thought the freight rail personnel surprises were past us after last week and the news from CN (picking a new COO from….BNSF) and CSX (hiring a Strategist) – see note attached, just in case - the latter strikes again by announcing the “departure” of CFO Frank Lonegro, the last of the CSX “Old Guard” and a man well-respected by the Street.  Signs of haste include  the fact that Kevin Boone, only recently elevated from IR to Marketing Strategy, now slots in to replace Frank – on an interim basis.  That move may at least clear up the issue of having two recently appointed strategists after last week’s surprise hiring of Farrukh Bezar.  However, it still leads one to wonder what’s going on behind the highly-charged dynamic outward posture at CSX (as chaos in personnel late last year did the same for UNP); CSX has remained tight-lipped, of course.  Many had tabbed Lonegro as a possible successor to CEO Jim Foote….Several have posited that this is a step toward a merger but….well, no.  just….no.

Speaking of succession issues, CSX has a lot of them (COO, CEO) and with the turnover, we are less knowledgeable about their bench strength than we should be.  And speaking of COO succession, many railroads will face that issue even as CN, reached out to Texas (when the world is looking to Montreal; more on CN and roster depth after their Investor Conference next week).  There’s still some time left on the gaggle of ex-CN ops guys’ non-compete clauses, too.  So, I would put UP, BNSF and NSC as well as CSX as companies needed to introduce the financial world to their high performing operators sooner rather then later….of CN’s ops turnover it has been said that railway, as are others, is to be trying to change their culture to accommodate the modern sensibility (refer to UNP’s Beth Whited’s speech at NARS a week or so back, where she in turn cited as a model in this regard Norfolk Southern, whose new “Chief Transformation Officer”/head of IR Annie Adams I had the privilege of meeting earlier this week).  Of the CN move to grab Rob Reilley from the BNSF, a former CTO there, the estimable Dave Dealy, had this to say:

“Rob spent most of his BNSF career in either intermodal operations LA or Chicago or as Regional VP of the Santa Fe Transcon (Chicago to California.  He is a very intelligent, critical thinking leader, well respected by those who work for him.  The transcon operation demanded precise execution of the service sensitive intermodal trains (UPS, FEDEX, JBH Premium and LTL) as well as the high volume steamship doublestack network. Over the past two years in my conversations with Mike Corey and JJ, they have had difficulty in handling the intermodal growth out of Prince Rupert.  Rob is a “sweat the assets” guy, and learned well from yours truly.  He will NOT do anything to degrade the PSR mentality at CN.  I believe that he is the right guy at the right time.  Big question is why did BNSF let him go?  Matt Rose had strict instructions to his PEERS, keep your hands off my people….Carl does not have that same relationship with his peers.  BNSF will miss Rob.”

Good news out of DC?  Actually, yes – the rails scored a victory freeing them up to negotiate crew size reduction (to 1 from 2) by utilizing the safety benefits of the huge PTC investment.  The FRA seemingly has put the ki-bosh on legislated 2-man crews in time for the fall section six notices that are the kickoff of (US) national rail labor negotiations – and on the very same day SMART Transportation Union (the former UTU, covering brakemen) national Legislative Director John Risch was telling the audience at the Wolfe Transportation Conference of his union’s to-date successful efforts to get state legislatures to produce laws mandating two man crews; the FRA’s notice of proposed rulemaking (essentially withdrawing the proposal for national 2-man requirements from the last administration) preempts any state efforts.

 

Bad news out of DC?  Well that’s the more usual turn of events – and it was, for a bad day and a half, anyway – the STB’s hearings on the increases in railroad assessorial/demurrage charges, and the public grilling of a pack of Class One CMOs,  was described as “brutal” by one rail lobbyist attendee (the hearings competed with the Wolfe Conference, taking away NSC’s CMO, and wasn’t webcast, anyway).  Notable speakers on the shipper side were the NITL, Cargill (calling the current situation “death by 1000 cuts”), International Paper, ADM. UP’s demurrage “gains” were up 16%, to $72mm, in Q1/19.  That doesn’t sound like a lot to me – and I do believe the rails are trying to change shipper behavior and buy into PSR.  The metrics show real service improvement, but one running theme (especially form the trade associations) was the shippers faced increased costs and yet had not yet seen tangible benefits from reliability improvements.  I am not sure I completely believe that (although recent customer surveys suggest that shipper ratings have not caught up to the improvements), but it does point out the increased scrutiny coming from regulators, the STB in particular.

The transport conference managed to pull a few folks away from the carnage in DC to form a “Regulatory panel”:

  • Sometimes questions are more revealing than answers – for example, one question summarized a prevailing misconception about rail regulation, which went essentially like this – if (as was discussed) we actually might soon (ish) get a full complement of STB commissioners, split 3/2, would we expect the three Republicans to support the railroads and the two Democrats to support the shippers?  Note – rail regulation isn’t particularly partisan nor like typical “government regulations but is in essence a fight over value between very large companies/industries!  Is it “Democratic”, say, to support Dow over CSX (or vice versa)?!?  As Former STB Chairman Chip Nottingham said on the panel, “Is it government’s role to protect big companies in a battle between large railroads and (usually) even larger shippers?”

  • Has anyone noticed the words and actions of the two GOP Commissioners, particularly the Chairman Ann Begeman, who appears “radicalized” (carrying the incorrect “rightwing/leftwing” view of rail regulations”) by her experience with CSX & PSR??

  • This fight over demurrage (etc) has become high profile and it’s easy to soundbite the rails into a corner (“my fees are up XX%!”) – the WSJ headlined “Shippers pay the price for speed” yesterday.  Note that in some cases what we’re seeing is simply an application of existing contractual requirements that had gone astray….

  • It may only be my opinion, but the late-2017 hearings on CSX/PSR, intended to “shine a light” (some might say embarrass) CSX/PSR leader Hunter Harrison, also served to publicly put the lie to the whole premise of “captive shippers” in the current economy, for the shippers at that hearing, some of whom were at last week’s (Cargill), complained about “having to pay higher truck rates” (not have no option, at all).  Those readers of “Railroader” will recall Hunter’s colorful response to that!

Bad news in traffic – well, there is still weather, but maybe more behind the latest week (#21) results – an almost 7% (-6.7%) decline in volumes (carloads -5%, intermodal down fully 8%); Canada was up and Mexico down, although less.  In light of recent rail volumes and truck pricing reports, I find the ATA’s +8% YOY April tonnage growth number to be….as suspicious as the reported Q1/19 GDP growth.  In fact, DAT’s volumes (units and just dry van) were up ~2%, and the Cass April Freight Index numbers showed a 3% decline.  So what’s right?  Even the ATA suggested that the April tonnage numbers might be “misleading”….Some have said that the rail service improvements owe more to the lower volume rather than the vaunted PSR changes, but the resiliency shown in the face of weather issues is a pretty good refutation of that premise, in my humble opinion.

Coming bad news in traffic?  Trade is still a worry, of course.  The lifting of the tariffs on Canadian & Mexican metals is bigger symbolically than in reality, and Canadian Prime Minister Trudeau began the parliamentary approval process on Wednesday, but the ongoing threats, tweets and tariffs in the USA/China disputes continue to roil the markets and distort the numbers.  But wait – as I edited this piece Trump’s latest trade-roiling tweet announced, apparently without any forewarning at all, new tariffs on Mexico (5% moving up to 25%) based on….immigration policies.  The WSJ stated that this “comes at an awkward time”.  You think?!?

  • Mexican import trade value surpassed that of China for the first time, in March – as global supply chains are slowly, hesitantly, being adjusted.  Some of the products cited in that regard include auto parts and electronics.  Interestingly for some commodities/products, the penalty for non-NAFTA auto percentages as lined up by NAFTA 2.0/USMCA would be cheaper than the 25% tariffs of directly shipping to the USA from China.  So can Mexico be a further alternative to China – or is the constant turmoil damaging to long term investments into manufacturing and supply chains?

  • And yet….Mexican FDI was up 7% in Q1/19; what now? 

  • Also hurting trade are non-war issues in China – the African Swine Fever and China’s basic ban on US scrap paper, formerly the #1 containerized export commodity….

Wolfe Transportation Conference offers a terrific late spring/mid quarter update – few revelations, no Canadians and many reiterations….however the latter (of FY19 guidance, itself reiterated after the weather impacted Q1/19 results) is actually saying something given the still below expectations volumes; one thing it implies is better-than-projected service (and related, productivity) levels in the rail group.  A coal and energy panel was interesting with Vistra calling for applause for the way the rails handled and recovered from the extreme weather,  That’s not something one hears every day.  Vistra and Southern Companies highlighted their continuing, irresistible move away from coal (and the rapid growth of  renewables within their portfolios).  Old friend Joe Adams of Fortress’ Transportation & Infrastructure Fund highlighted their CBR/refined products ventures in Texas centered on exports into Mexico  with CBR and blending on ongoing (even with pipeline development) part of their strategy (good news for Canadian rail, Watco and KSU in a tough week for the latter).  He also allowed that, yes, their Maine short line operation is for sale.  Some company specific highlights:

  • Norfolk Southern featured CFO Cindy Earheart with CMO Alan Shaw called to the principal’s office in DC.  NSC service appears to be improving most rapidly – and this is before they install their new Op/Plan (“Top 21”) over the next two months, on top pf the completed “Clean-Sheeting” bottoms-up process.  I wonder if min many ways that this is a sort of re-tightening of their once-renowned operating discipline (remembering their late COO Steve Tobias).  To my pleasure Cindy continued to defend their capex levels (“ongoing 16-18%).  I think I do need to hear more about their marketing plans and Intermodal’s role given their longtime growth leadership in that segment.  There was a lot of discussion at the conference about NS’ “Yield Up” policy – it was noted that in terms of yield (revenue/unit – which is really not price) NSC has like a 20-30% gap to CSX – 23% in 2018, although grew carloads 14% more.  Will we see a reversal of the “growth at all costs” outlook – or is that, as I suspect, a false premise?

  • Union Pacific’s CEO Lance Fritz reiterated guidance despite the water-logged Q1 results and a slow recovery (QTD volumes are down 2%) afterwards.  Interestingly, and of course somewhat terrifyingly, Fritz attributed their 11% QTD drop in domestic intermodal to the “looser truck marketplace” – given that the ATA showed big volume gains in truckload – something seems off.  Could UPO, or rails, have lost that much share, or simply chosen price over volume under the PSR guise?  And is BNSF really still a problem?

  • CSX, represented by CFO mark Wallace, seemed serene and confident (before the CFO bombshell came out).  After my question, Mark allowed that Kevin Boone would report to him (“Marketing & Strategy) while the new hire, Bezar, would report to the CEO (“Head of Strategy”).  Of course that is all up in the air, now.  Volumes are up 3% - ex-IM, which is down 9%, below the ~7-8% de-marketing levels.  One worrisome, if perhaps simply honest, statement was Wallace saying that he would “love to grow Merchandise  by 3%” – I would hope (have hoped) that given the improved service, NS’s PSR stages, market share opportunities in paper, etc – that +3% would range between a goal and a stretch goal (another way is to say it would be GDP+).   Their coming Trip Plan Compliance will measure empties as well – which ought to both drive efficiency – and help regain/retain merchandise market share. Jim Foote at a later conference noted that there was “billions and billions” of merchandise business available – chemicals, lumber, etc.  That seems like a 3% goal is possible…. But maybe it might require a higher level of capex?  Nothing new on line sales (“ongoing process”). 

  • Genesee & Wyoming – for the last time?  Despite the national increase in share repurchases GWR showed a slowdown in buybacks – another wisp of smoke in the ongoing search for going-private fire?   Nothing much came out of what seemed to be a rather perfunctory, if not desultory, AGM.  However, at the transport conference there were interesting investor discussions of 20-30% premiums to the current price (NAV).  Further Bloomberg suggested that the process included some of the biggest PE names (AKA “the usual suspects”) were already into the second round, and that GWR was looking for something at or above the upper end of the afore-mentioned range.  Is this for real (as the short line community believes) or a valuation process?

Other news:

  • CMA CGM, the #4 container liner company, and Med Shipping (#2) joined the Maersk (#1)/IBM blockchain platform, “TradeLens”….maybe there’s something to all the hype, after all?

  • Maersk also stated that the trade wars could lower its anticipated 2019 global TEU growth rate from +3% to +2%

  • Ag lobbyists have been busy, beyond hissing at the rails – they secured $16B in federal trade war relief….

  • But farmers continue to have a tough time of it, as….”unusually wet weather” means that only 58% of the corn has been planted (usually ~90% at this time) and 29% of soybeans (66%); what was supposed to be a record or close corn crop year looks very different now (a decline now forecast by the USDA); Deere announced that they would cut H2/19 production by fully 20%; grain prices rallied (corn futures up 24% this month, wheat 23% - but soybeans only 5% thanks, again, the trade war).

  • Unusually dry weather, on the other hand, has shrunk Panama Canal capacity (perhaps a boot to KSU’s PCRR?)

  • USPS will test a driverless truck route using “TuSimple” from Phoenix-Dallas; another chance to ask if the hype is getting more real.

  • BHP is deciding on an $8B potash project in western Canada – which may help boost 2022 carloads

Anthony B. Hatch
NARS 2019 Person of the Year

abh consulting
http://www.abhatchconsulting.com
1230 Park Avenue suite 4A NYC, NY 10128
abh18@mindspring.com