October 3, 2018
Greetings from Calgary on the eve of the Canadian Pacific Investor Conference….There is SNOW on (all over) the ground here!
Busy days – I have fallen slightly behind on my writings on the rails, but the beginning of fall has seen 4 major conferences (and weather related challenges to travel that canceled one), and three major announcements (UP & PSR, BNSF, “USMCA”) so let me catch up in a hurry:
The China Trade Cold War continues to simmer
BNSF announces that Executive Chairman Matt Rose will retire next year….
Everybody’s talkin’ Union Pacific and their move to ease into PSR – does that mean a lack of commitment or a more diplomatic way to go about change?
CP will close out a year in which every publicly traded railway held a major investor conference – save one….(And UP’s info from May is already past its shelf-life….)
A series of shipper and railway conferences (IANA Expo, NEARS, AREMA< MSU) provided excellent insights into the state of the rails heading into the backstretch of 2018
CP-PHH-PSR: CP will give us what surely will be a detailed update on their version of the PHH-PSR (post Hunter PSR) railway tonight over cocktails, and more formally, tomorrow. CEO Keith Creel is everybody’s All-American (in Canada) and will no doubt have to fend off questions about how soon he is moving to Omaha, or Norfolk (Atlanta?), or even Jacksonville - but he is staying in Calgary/Chicago. I am excited to hear about growth potential, tech investment, capex in general – to see how far along on the PHH spectrum (as compared to their competitor CN and to CSX and….) they have gotten. This meeting also provides a great chance to get up and personal on the true implications of removing the uncertainties tied to the NAFTA fight.
Dispute resolution stays the same (“chapter 19”) and the 16 year/6-year review time frame, both wins for Canada, help provide some certainty for supply chain investment
Excepting the updating for technological changes, and the efforts to sway some manufacturing capital decisions, this is seen by many as an exercise in (re) branding, and trophy hunting – which is fine by me, as far as rails go…
The US did not remove the steel/aluminum tariffs!
They did remove a large part of the threat of auto tariffs (5.2mm total cars exempted versus 4.1mm shipped from M/C last year)
Few outright endorsements but audible sighs of relief from the autos (the Big # in particular) – and from the grain trading houses
Many saw the conclusion of NAFTA 2.0 as a way to fight on only one front, a strategy endorsed by another powerful leader of German heritage, in 1917 (Ludendorff). Here it gets interesting – Jack Ma stated he sees this going on for a decade (forgetting perhaps, that we still hold regular elections in the USA)….some recent events/thoughts:
Ford announced that tariffs (including of course, those in metals) have cost it $1B; meanwhile Nissan and Daimler told their nervous stakeholders that they would invest ore in the US
Fedex told an investor audience that through its bookings it could tell that “business levels in China are moderating”
“Farm Aid” (the govt handout as a salve for tariff losses) “wont cover (those) tariff losses” says WSJ – remember the example of the ag trade war with Japan and the creation of the modern Brazilian soybean industry….
In an effort to reassure their investors earlier in the year, many rails downplayed the actual impact of a NAFTA cancelation – even those in Mexico and Canada - would be minimal (even as they fought, commendably, to retain NAFTA); the real threat, said they, was any sparking into a trade war with China….we’ll soon see how their predictions hold….
Dope/Rope-a-dope? Or a Rose? Further thoughts on Union Pacific, and its decision to install PSR (gradually) not long after a big Investor, strategy-unveiling conference….As well as the April 2019 retirement of Matt Rose
The gradual rollout of PSR is a huge mistake, betraying a lack of ruthless, Hunter-like commitment
What is therefore required is a non-UP player, preferably a “star performer” to be “Hunter 2.0”. This forgets that even if this was a pressured decision, by UNP CEO Lance Fritz (based on conjecture), it is nonetheless a public decision by Fritz, not a recruitment drive by the Board and/or some activist investor….
The gradual rollout is ingenious - taking the best of EHH PSR without the “baggage” of injured relations with all of the other stakeholders. UP is a very political (and politically savvy) railroad, and they well understand the risk of service disruptions on a massive (as the largest railway in North America) scale, as well as the success at CN, CP and now CSX as they enter the PHH period. Indeed, the STB is already asking for regular phone conversations with senior UP management , proactively putting their snouts in the tent….
Some have already called the planned retirement of BNSF’s Rose an internal (Warren) referendum on BNSF’s aggressive pricing that led them to grow faster but at lower margins (higher OR) – that seems a far stretch, given Matt’s day-to-day involvement in pricing (not huge, is my guess - though he often said one advantage BNSF had over the publicly-traded rails was price “flexibility”) – I think the reported margin difference has been colored by BNSF’s string IM growth, on a real and a relative basis….lets see how annual ROIC compares, remembering BNSF’s historic improvement in that category despite being led, by far, by IM, during the first phase of the “Railroad Renaissance” (say 2003-08).
Matt and I will share the stage at MARS (Midwest Association of Rail Shippers” in a “town hall” forum in January – now we’ll have even more to talk about!
It was a very lucky day for me and for Berkshire Hathaway when I met Matt Rose,” said Warren Buffett, chairman of Berkshire Hathaway.
Conference Updates Highlight Strong Demand, Issues of Service Fulfillment (note due to weather issues SEARS was canceled and I between weather, flight issues and the Chicago hotel workers rolling strikes I got to AREMA (Association of Railway Engineering and MoW) for my speech but didn’t get to hear much so a closer look into Class One 2019 Capex will wait for the Railway Tie Association conference (10/22-24) and then NRC in January)….
IANA (Intermodal Association of NA) “EXPO” – a hugely important annual conference/convention in Long Beach was, like the couch after Thanksgiving, full and happy, with some upset tummies….some critical players (JB Hunt, etc) did publicly complain about rail velocity (and terminal processing speed) but, like with NAFTA 2.0, it coulda been worse….One question circulating around was why rails didn’t grow faster then their historic trend line, in the this best of all possible worlds market – was it by design (focus on rates over volume or and/or share)? By less than “precision” execution” By the “Cult of the OR” (longer trains, little slack capacity, little investment in “excess capacity”, etc)? I led a terrific panel on demand planning (or lack thereof) and hear a good one on utilizing/combining IM and scheduled merchandise trains in low-density markets (PSR, bay-bee!). I also heard or overheard:
a. The National Retail Federation raised their sales estimates for this year to +4.4% from +3.8% (although a lot of that has already been captured, like counting the horses in the field from the barn door)
b. Ecommerce was clearly a tailwind for rails and will continue to be so….there were something like 10 Amazon attendees!
c. There was less obvious Class One presence – booths on “the floor” only by BNSF (notable their IM head, Tom (Hoosier) Williams was actually at the booth and, I think FEC (I saw KSU and a few others on the floor or in the breakout rooms)
d. One reason is the massive and clear “pre-buying” this summer ahead of the tariff deadlines (9/24); Q4 looks to be a bit slower than expected and certainly than the summer levels (though comparisons are also harder) – see Q3 Preview next week and AAR’s RTI #s soon….
e. ATA reports that August truck tonnage dropped 2%!
f. Intermodal Impressario Larry Gross points out that reefer trailer growth was a driver behind the 53’ TOFC numbers
g. The ELD/driver issues were the underlying theme (of EXPO; of the year) – CHR noted that a “day” used to be routinely ~500 miles now was in the 400s
h. Automated Vehicles in long distance lanes – not bloody soon! An excellent panel on trucking technology showed that the best work was being done in Class 5, 6 & 7 trucks (which could help in drayage, terminals etc) and not on Class 8 trucks (confirmed by panelist Volvo!)
NEARS – North-East Association of Rail Shippers held its fall extravaganza in glorious Westchester County (why?) – nonetheless it was well-attended and had excellent C1 attendance, including new CSX CMO Mark Wallace, in “town” with new Industrial Products head Dean Piacente to press the flesh and accept an award for EHH, and a speech by the afore-mentioned Mr Williams of BNSF on that great ecommerce opportunity and on using technology for enhanced customer (even dray driver) experience and productivity and an automated cranes pilot program at the KC terminal. Pan Am, one of the largest regionals (likely the largest in the east) was ever-present and appears busy – even seeing New England paper mills reopening (another side effect of ecommerce)! The talk in Westchester was also of UP and PSR, and of CSX (and others?) and short lines, and whether a single buyer would get the 6 in NYS/Canada or several players would be involved; I guess (guess) the latter….
ETC (other issues with serious rail implications)
Hi-Crush, a major sand miner, announced that it will idle some northern white sand (rail-served) mines in favor of its Permian brown (“dirt”) sand, truck served….that’s not a good sign….
It may all be moot anyway, as OPEC, an uninterested observer, says US shale growth will peak by 2023 and output by 2028
ISM still string at 59.8 but slowed from the August levels (61.3)
Fortress’ “Brightline” passenger rail operation (on the old Flagler, FEC right-of-way in Florida) is expanding by buying XpressWest, rolling the dice (sorry) on an LA (ish)-to-Vegas attempt that when I last saw a deck (and I am not a consumer/luxury analyst) seemed to have some design flaws (true LA access, class one buy in) that may have been resolved. In any event, its now a second major passenger effort by Fortress – that’s very very interesting….
“The word “infrastructure”, quoth the FT, “has quietly disappeared from US political discourse over the past year or so (but in the investment world it remains ‘slide deck magic’)”
Anthony B. Hatch