May 29, 2018
Greetings and I hope you all had a lovely and reflective Memorial Day:
It’s been a few weeks of “Spring Conference Season”, an excellent chance for a mid-quarter catchup with the rails, with all but BNSF (sigh) and CP actively participating. Canadian Pacific lost the ratification vote, at long last, and is likely to be on strike by the time you read this (remember my long-held opinion that a strike is not an investable event (but the contractual outcome might be). Meanwhile, my partners in RailTrends (November 29-30, NYC www.railtrends.com ), “Progressive Railroading” magazine, announced that the retiring Association of American Railroads CEO , longtime RT participant and even longer term friend of mine, Ed Hamberger, will be the 2018 “Railroad Innovator of the Year”. Here’s what I told P/RR Editor Pat Foran about Ed;
Ed has helped the AAR through the flowering of the "Railroad Renaissance" with grit when needed to fend off ill-conceived regulatory threats and grace, always. Under his tenure rails moved through enormous challenges (coal, for example, or the PTC mandate) and great service responses to the dynamic conditions faced - the rise of intermodal, increased capex and service levels (but not all the time!), technology as both a competitive threat and railway enabler. Ed not only "walked that wall", as in " A Few Good Men", defending this ancient but still vital industry, but also led innovations in government relations (PPPs, CREATE) as well as in technology and safety. Under his beneficent leadership the rails have done so well, defended their value (there are currently no rate cases pending before the STB) and expanded to be a truly continental network; like Victoria to 19th C England we may look back on this as Rail's "Edwardian Age" ...
So, onto the conferences, webcast on attended (Wolfe)….There were few revelations, of course – mostly “reiterated guidance” etc, although there was palpably more confidence on the demand side as volume growth is accelerating. Can they handle it? That’s the rub – most said “of course” but recent trends in the metrics belie the “stabilization” sense we had at the Q1 calls – this of course bears serious watching. And listening to some of the investor Q&A reminds us of the risk of short-termism and the long life of the “Cult of the OR”….
KSU (CEO Pat Ottensmeyer), whom we recently visited, showed tremendous confidence on their f-part growth plan: Refined products (whose growth potential we detailed last week – note – using our own estimates as KSU continues to be “shy” about guidance in this spot), CBR (working with the CP), autos, of course, and plastics (the mega-Sasol plant is beginning its “slow/steady ramp-up”). Five, right? Intermodal! Grain will remain important but is the commodity where KSU sees the largest impact of congestion (ie; service problems from other carriers on the network impacting them). Note that 3 of the 6 commodities I listed involve a US trade surplus….
CNI (CFO Jobin) is ahead of its service catch-up plan and has great confidence that an accelerating H2 (Q3 service will be “stable’, Q4 “improving”) will lead to a very strong 2019 (and a restoration of CN to the top rank of transportation). Two thoughts came to me out of their presentation(s): There is no news or public timeline on their CEO search (they must, in my opinion, remove the “Interim” label from the man in charge now,. JJ Ruest). And when they said that they risk over-investing (and the risk of being “early on capacity”) versus being short on capacity – due to the time and expense of “catch-up” and the customer and political risk – this simple and correct response was viewed as….heresy. Fully two presentations later (CSX), in their Q&A, that statement was called “provocative”. Rails have gotten away with poor service and solid growth (in volumes and price) – but at what cost to reputation? To volumes not carried? To share not captured? The Q1 results – declining velocity and big gains in earnings - isn’t a sustainable model! At least the terms of the debate have been publicly framed….
CSX has gone from “Apology Tour” to Victory Lap – nice to see….In fact, they got this question: “How is the interchange with other railroads (presumably NSC) affect your fluidity?”!! My, how times have changed – 180 degrees in 9 months. The biggest piece of “news” was CEO Foote’s public admittance, planned or not, to their being that once-thought mythical 8000 miles of network under some form of review, dividing into tranches, and taking into consideration the sky-high valuations being paid – though not part of the 2020 investor Plan. Two lines we know of; one maybe close to some form of resolution, but now others? Meanwhile the intermodal re-think continues (though still lower priority than the merchandise opportunity – the classic PSR playbook that worked so well at CN….
NSC (CMO Shaw and CLO Scheib) – they see growth everywhere and reminded us that, as they stated in April, the demand risk is to the upside. QTD volume growth is 7% - but the question asked of them – “is that too much for you to handle?” – is valid given recent metric trends downward and the likelihood of another quarter of $40-50mm congestion costs (again – costs only – not opportunity costs). They continue to get price, especially it seems in Intermodal (volumes up almost double digit this quarter). Meanwhile, they consistently say that capex isn’t the answer (in one conference is was called….”somewhat pointless”) to their fluidity issues (due, it seems, to the delayed impact). That leaves me concerned; investors are now concerned that they will lose share to CSX (see times; how they have changed) given the OR goal gap (65% to 60% - ignoring the IM impact, of course). NSC is leading the initial skirmished to the FRA on technology and crew-consist, following up on Sheib’s excellent presentation at last year’s RailTrends….
UNP is a special case as we gather in Omaha this week: Union Pacific will host a much-anticipated Investor Conference over a half day on Thursday (5/31) so they were, in the words of CFO Rob Knight, reluctant to “steal any of their own thunder” in these mid-term equity conferences; it was clear from the Q&A what investors want to hear about:
Cash Flow and Buybacks – in light of their post-tax reform review of their balance sheet, the results of which will be revealed Thursday, and their continued industry-;low capex guidance rate
The Operating Ratio (OR) targets – recently walked back a bit near term – and whether the 55 goal is real
However, this is NOT what I most want to learn, but rather:
Their service issues – have they indeed stabilized?
What happened to get them into the fluidity issue to start with – the network effect (CSX), PTC installation, and weather (Harvey etc) are not enough of an excuse….if we don’t know how this occurred, how can we trust the plan to resolve it?
Can they definitively say that their (relatively) reduced capex, and the lag to western rival BNSF, has not impacted service? (and possibly pricing?)
What is their plan to return to the top of the industry leaderboard in terms of growth?
UP vs BNSF – thoughts on Capex (UP’s goal of 15% of revenues is less than the rail average for the last decade)PTC (completion; future use); Ag; pricing (coal, international IM)
More from the conferences:
Wabtec gave a concise, bullish view of their merger with GE Transportation – but I heard grumblings from the Class One representatives that the mega-major supplier of both PTC (and maybe “PTC Two”) – and of locomotives, was a lot of power in one supplier….
Hub Group know that they are in a sweet position – they see “no ceiling” to IM pricing opportunity and see a long but still pronounced peak season this year leading into a string price environment next year, as well….
Amazon, which has a blow-out quarter, is becoming a customer of size with railroads even as their business (as a percentage of their total) with the parcel carriers declines (though not their absolute volumes as they continue to grow so, so fast….
More from the broader world beyond equity!
Diesel fuel price’s “relentless rise” – I am quoting the American Trucking Association who noted that by mid-May (in “Transport Topics”) prices were up 27% YOY; Maersk, who described their Q1 pricing as being “half of break-even”(!), initiated additional surcharges in their liner business
Neither those conditions, nor the even more relentless driver shortage, have stopped Class * truck orders (up 37% in April; trailers up 11%)
Anyone notice this year’s “Infrastructure Week” in DC earlier this month? I dint think so….so you missed the Secretary of Transportation stating that an “Infrastructure Funding Source remains Unclear” (TT, again). You might also have missed the speech form the Australian Ambassador to the US (how could he not have been given Canada??) Joe Hockey urging mass privatization….
Steel prices are up some 250% this year in the US, great for some (Deere stated that its forced to raise prices in farm equipment)
Watco bought a marine 3PL! This deal comes off as less “out there” when one takes into account Watco terminals and their own 3Pl business, and the target’s (MID-Ship) extremely close relationship with Watco partner Kinder Morgan….
Westward to Omaha!
Anthony B Hatch