CSX & Jim Foote 2020 RRIoY

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Greetings;

My Tweets (join up!):  Jim Foote of CSX is the ’20 RT “Innovator of the Year” for his taking CSX over the goal. There were lots of players on the drive, inc. a HoFer, but it was Jim as CSX QB-1 that produced the score.  So We at  RT couldn’t be happier – he will accept (live?) on Nov 19….Jim was the first person I met in RRs (CNW in ’88!  Gulp!); moved from his Chicago (like you didn’t know) home to CN for the IPO moving to CMO. After a brief time outside of RRs (what’s that?), he came back to work with his old boss Hunter at CSX. The rest is history.

Jim Foote will be the 2020 RailTrends Railroad Innovator of the Year”, and while we at RT couldn’t be happier, in typical fashion he downplays the honor (“I am not sure if I am worthy as an ‘Innovator’ as I am focused on getting the industry back to where it was about 75 years ago” – albeit, I would add, via PSR).  See www.railtrends.com and come see us on November 19-20 (hopefully) in NYC.  By the way, 75 years ago wasn’t when we met, it just sometimes feels that way (below).  Now, it is clear that while he follows some great rail leaders (in his career and as IoY, and of course stands on the shoulders of a great rail - maybe just “business”- leader (in his career and as IoY).  But, it is Jim who has finally taken CSX to industry leadership.  And that is no small feat, for despite the variety of strategies and some pretty darn good leaders, maybe some less good to be fair, and despite a lot of attention, consulting, strategic advice, shareholder activism and multiple restructurings, CSX has been historically far from its current exalted position over the course of the 30 years (ugh – plus) that I have followed the company.  I have been there for leaders - from Hays Watkins to my friend John Snow to Jerry (“Mr. Safety”) Davis to “Gentleman” Pete Carpenter to Michael Ward and his irrepressible side-kick Clarence Gooden to Hunter Harrison - in a tumultuous 3 decades, summed up well in the special edition of Trains (“CSX at 40”), seen:

  • The building of the transportation conglomerate (at a period when the rest of the railway holding companies were divesting non-rail, non-core assets) highlighted by acquisitions of pipelines and the venerable steamship line Sea-Land (now part of Maersk); the lack of synergies between modes was not noticed by the major management consulting firm that orchestrated the deals but was by the market.
  • The purposeful, but mercifully brief, dis-aggregation of the rail into track, cars, etc (the very thing that when imposed in Australia and the UK has caused such chaos)
  • The attempted takeover (and subsequent split) of Conrail
  • TCI and the first (and successful) proxy fight in the railway industry since the 1950s
  • Mantle Ridge and Hunter Harrison (RT IoY 2009) in the 2nd proxy fight since the 1950s
  • PSR, STB and the sad death of Hunter followed by “the apology tour” – but the radical restructuring of the network (per “CSX at 40” – 2017-2019 volumes were down 2% but average daily trains on the network down fully 46%); in the latest webcast Jim said that priority number one was “fixing the service product” and….” mission accomplished” (I agree with the sentiment but wince at the choice of phrase).
  • Jim Foote and the resurrection of CSX and the culmination of PSR 1.0.  In this, ironically, Jim is playing a role similar to Claude Mongeau (RT IoY 2016) who won the “bake-off “ battle with Jim to succeed Hunter at the CN, and lead that PHR railroad to the next level (doing many of the things Jim told me that he would do, at the time – “kinder & gentler” post-Hunter, AKA “re-engaging” at CP).  In much the same way, in both similar and wildly different circumstances (think of the size of the network and of the government interest, for example) Jim has led/is leading CSX now to the “next level”, and thus is joining his former colleagues to win the award (and if history is any guide, look for Railway Age to follow us again….).

OK, 31 but not 75 - On a personal note I first met Jim in his role as head of Investor Relations at the Chicago & Northwestern (CNW), on a train to the PRB way back in (I think) 1989.  Jim and Pat Ottensmeyer, CEO of Kansas City Southern, met about the same time in his role as Assistant Treasurer of the ATSF (the “Santa Fe”) are my oldest  - as in longest tenured - friends and colleagues in the business.  Although they come off as different types, there are some real similarities:  Both came from mid-level positions at “fallen flag” Chicago railroads to reach the top elsewhere.  Both are Chicagoans at heart (here Jim gets the edge for being a Sox fan).  Both have had to make the hard decisions but are nice guys that you want to spend time with.  And with Jim this year, succeeding Pat, both are winners of the “RailTrends Innovator of the Year” award.

“The most disruptive quarter ever” – so said Foote about CSX in the rollercoaster of Q2/20.  Jim was a major presence on the call (always, of course, as CEO, but seemingly more so in trying to explain – and understand – the implications of this period.  Volumes were down 20% but of course, that reflected the steep from in the first half of the quarter and the 20% rapid rebound from the trough. (now +25%).  Revenues were down 26% and EPS down 40% (inline, if that matters) while the OR increased 590bps – but still to 63.3%, a rather handsome number in all of this.  Labor expense was down 22% as was an adjusted look at an overall expense; crew starts were down 24% versus that 1/5th volume decline.  Pretty good, not their best but they appear to be taking the longer-term view here (for example on labor – furloughs versus extra boards, etc).  They successfully fought off the silly questions about Q3 OR (really?!?).

  • Operations turned in a solid performance, driving those expense reductions while improving velocity by 6% (dwell increased a bit – 2%, though) and providing good service (on-time originations flat at 88% and arrivals improved by 15% to 84%).    Carload Trip Plan Compliance, a real KPI, declined a bit sequentially but was still up 8% to 80.5%; ditto for Intermodal TPC (6% better YOY at 94%); both were improving sequentially in the rebound.
  • It wasn’t all roses.  We could use more stats (train length/weight? In Q&A we were told they improved 4%/7%, respectively).  Safety numbers went the wrong way – the PI Index by 40%, the train accident rate by 9%.  Some of this can be explained, as CSX did, by the math (train accidents, for example, were at an all-time low but train miles dropped even further).  CSX announced it was “undertaking (a) company-wide safety engagement initiative in Q3” – CSX had done this periodically over my tenure dating back to Jerry Davis in the 1990s.  CSX spent about $10mm on C19 efforts in the quarter (after stocking up that will drop down to about $2mm/Q).
  • Capex had both good news (CFO Kevin Boone – “we are not going to cut Capex”) and bad (CFO Kevin Boone – “Expect Capex to be at the low end of our initial $1.6-1.7B guidance”).  But they are getting great value during the volume drought – as COO Jamie Boychuck pointed out (rail and tie installation are flat YOY but costing $17K less per mile of steel rail and $3 less per tie).  There was a question on when to expect an increased pace of the share buyback program….and cash on hand has grown to $2.6B (maybe almost more than $2B then needed during normal operating times) as an act of prudence (see below).
  • There of course wasn’t much guidance (CMO Mark Wallace:  “the outlook remains unclear” plus bringing back “cautiously optimistic” out of retirement to describe H2; Boone: “We’re not out of the woods yet”).  But domestic IM is actually growing.
  • Also of note:
    • Jim stated that they don’t have any (more) lines for sale – “our strategy is to grow the company; we're not (i.e. no longer) interested in divesting” after their earlier efforts (and the recent CN divestiture announcement).
    • Speaking of CN, there was no mention at all of the status of the CSX line sale to CN of the “Massena Lines”, held up by the STB….remember, this is the cautionary tale for all of that “RR Consolidation” talk….
    • Line of the webcast:  When asked about the decline in coal, Kevin Boone responded “It’s only been going on at CSX for the last 10-15 years.  So, I mean, it shouldn’t be a revelation that it is going to have an impact on the third quarter.” (!!)
    • Supporting Boone’s assertion (aside from, you know, common sense):  America Is Burning the Least Coal Ever With Virus Sapping Demand.

 

Anthony B. Hatch 
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18